SEBI Bars 14 Entities from Securities Market in Front Running case related to Reliance Securities The market regulator Securities Exchange Board of India (in short SEBI) restrained 14 entities from securities market for four years and levied fine amounting to Rs. 70 lakh against them in a case related to front- running by some former dealers of Reliance Securities limited and their...
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SEBI Bars 14 Entities from Securities Market in Front Running case related to Reliance Securities
The market regulator Securities Exchange Board of India (in short SEBI) restrained 14 entities from securities market for four years and levied fine amounting to Rs. 70 lakh against them in a case related to front- running by some former dealers of Reliance Securities limited and their connected entities.
SEBI had received surveillance alerts generated from its surveillance system in the months of December 2019 and January 2020, pertaining to front running activities of certain suspected entities and initiated a preliminary examination into the present matter and observed that Ms. Meena Vira in collusion with certain other entities, was prima facie front running the trades of Tata Absolute Return Fund, a scheme of Tata AIF, a SEBI registered Alternative Investment Fund (hereinafter referred to as "Big Client").
In consonance to the nexus, it was found that they have front-run the orders of the Big Client on multiple occasions during the investigation period and earned considerable wrongful profits.
Front-running refers to an illegal practice in the stock market where an entity trades on the basis of advance information from a broker or analyst before the information has been made to their clients.
Pursuant to the preliminary examination, an Ad Interim Ex Parte Order dated August 7, 2020 (hereinafter referred to as "Interim Order") was passed in the matter, inter alia restraining those suspected entities who are also the Noticees in the present proceedings from accessing or associating themselves with the securities market till further directions, as they were prima facie observed to be engaged in the act of front running the trades of the Big Client. Further, Noticees, jointly and/or severally, were directed to deposit the proceeds of the gains unlawfully earned by them by carrying out such prima facie front running trades, in an escrow account which was cumulatively amounting to Rs. 449.14 lakh.
As the Interim Order was passed pending completion of investigation, SEBI proceeded with the investigation in the present matter to ascertain as to whether the acts of the Noticees were in violation of the provisions of Securities and Exchange Board of India Act, 1992 (hereinafter referred to as "SEBI Act") and SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 (hereinafter also referred to as "PFUTP Regulations") during the period 1 December, 2019 to 10 August, 2020 (hereinafter referred to as "Investigation Period").
It was observed that around ninety-nine per cent of trades of the Big Client in value terms were executed through their stock broker, Reliance Securities Limited (hereinafter referred to as "RSL"). At RSL, the Big Client was placing orders through the following three Dealers namely, Mr. Harshal Vira (Chief Dealer of RSL), Mr. Bhavesh Gandhi (Senior Dealer of RSL) and Mr. Abhijeet Jain (Deputy Dealer of RSL). Thus, they were regularly in possession of information of the impending trades of the Big Client which was not available in the public domain.
On an analysis of trades executed from the trading account of front runners (for short FR), it was observed that orders were placed just before the impending orders of the Big Client or before the last tranche of the order of the Big Client and these orders were subsequently squared off to earn profits. Further, from the pattern of trades followed in the trading accounts of FRs, it was noticed that the trades executed from the trading account of FRs, have either followed a Buy-Buy-Sell pattern or Sell-Sell-Buy pattern while front running the orders of the Big Client.
Based on the afore stated factual findings unearthed during the investigation, a common Show Cause Notice dated 27th May, 2022 (hereinafter referred to as "SCN") was issued to the Noticees alleging that the front running trades would not have been executed from the trading accounts of the FRs, had there not been any nexus between the FRs and the Information Carriers (in short IC).
The SCN further alleged that by indulging in front running activities the Noticees had acted in a fraudulent manner hence, such actions were alleged to be in violation of Sections 12A (a), (b) and (c) of SEBI Act and regulations 3 (a), (b), (c) and (d), 4(1) and 4(2)(q) of SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 (in short PFUTP Regulations).
The single Whole Time Member S.K. Mohanty in its order observed, "the scheme of events also amply explains the strategy adopted in the extant matter wherein the Noticees who were directly connected with the non-public information of the Big Client namely, Harshal Vira and Bhavesh Gandhi by virtue of their employment with Reliance Securities Ltd, have used their family and friends' trading accounts to execute the front-running trades, which was done not only to hide their identity/ identity of the ultimate beneficiaries but also to escape regulatory detection."
Accordingly, the regulator prohibited the 14 entities, including individuals from the securities market for a period of four years.