Mumbai: Stock markets regulator the Securities and Exchange Board of India, or Sebi, will review its regulations that deal with fraudulent and unfair trade practices as they do not define front running.
Front runners use confidential information for buying or selling securities ahead of a large order with an underlying objective of benefiting from the price movement.
“We will need to have a serious relook at these regulations,” Sebi chairman U.K. Sinha told journalists in Mumbai.
Earlier in the month, the Securities Appellate Tribunal (SAT) set aside a Sebi order penalizing three persons for alleged front running, the first such instance involving individuals, raising questions about the efficacy of the law that deals with fraudulent activities in the securities market.
SAT set aside the order on grounds that the existing regulations on Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Markets Regulations, 2003, (FUTP Regulations) do not clearly define the term “front running”, and even if a particular fraudulent transaction can be construed as front running, it applies only to market intermediaries and not individuals.
The tribunal on 9 November overruled a Sebi order that barred three persons from dealing in securities and imposed a Rs.1.13 crore fine on two of them. They allegedly made a profit of Rs.1.56 crore from 557 synchronized trades on the National Stock Exchange (NSE) and 50 on BSE between January 2007 and March 2009.
A Sebi investigation showed that Kanaiyalal Baldevbhai Patel and Anandkumar Baldevbhai Patel, two traders, traded on information about forthcoming orders from their cousin, Dipak Patel, a former portfolio manager at Passport India Investment (Mauritius) Ltd.
Sebi found that Dipak provided information to these traders about forthcoming trading activity of Passport India and, taking advantage of that, Kanaiyalal placed and executed orders ahead of Passport’s order to make a profit from the price movement.
Sebi found that the trades were executed using a phone number registered in Anandkumar’s name and, hence, Anandkumar aided and abetted the so-called front running, according to the regulator.
Securities market lawyers said front running is rampant in India, with confidential information about forthcoming big orders being discreetly passed on by some people at big brokerage firms, but added that because the term is not defined under FUTP Regulations, it makes it difficult for the regulator to book the guilty.
Mint reported on Wednesday that the SAT ruling is likely to get the market regulator mulling over the efficacy of FUTP Regulations in their current form, as it leaves out persons as opposed to its earlier 1995 regulations.