The Securities and Exchange Board of India (SEBI) has recently demonstrated some slick detective skills in catching white-collar offenders even in areas traditionally considered elusive. The most recent example raises this bar even further.
It is a ruling where certain alleged front-runners have been speedily caught using latest technology, combined with some old fashioned hard work. Most of this was likely done by officers sitting behind their desks, and in less than two months.
Let’s quickly understand what is front-running with an example. Say, a client places a large order with their stockbroker to buy shares in company X. The seasoned stockbroker knows that executing this order will result in rise in price. They first buy shares for themselves and then places their client’s order. When the price expectedly rises, they sell their shares (called ‘buy-buy-sell’). They profit at the cost of client who pays a higher price. They have thus ‘front-run’ the client’s order. Large sales are also similarly front-run following reverse steps (sell-sell-buy). Front-running thus gives quick, assured, investment-free, unscrupulous and also illegal profits.
Something similar happened in the present case. Certain funds/portfolios of the IIFL group carried out their transactions in shares through an employee/ dealer. This dealer allegedly passed this information to a sub-broker. Both the men then used connected persons as ‘mule accounts’ to carry out front-running.
The transactions happened between December 1 and August 10, and were first detected through SEBI’s alert system. SEBI meticulously examined data relating to bank/demat/trading accounts of the parties. Preliminary evidence of connection such as being a relative (spouse/son), having introduced the other in bank/broker accounts, etc. were found. Mobile call records were scrutinised which showed numerous calls between the parties. The time logs of the transactions were in many cases almost self-explanatory with buy-buy-sell (or sell-sell-buy) often being within minutes in sequence.
SEBI then examined the disposal of these profits. It was found that profits were deposited in bank accounts that appeared to be used exclusively for this purpose. Cash was regularly withdrawn through ATMs, raising a suspicion that this was done to eliminate audit trail.
Digging further, SEBI found that these ATMs were near the residence of the dealer and the sub-broker. The CCTV footage of the ATMs showed that, in many cases, the dealer himself was withdrawing the cash from such accounts belonging to the front-runners. In another situation, SEBI couldn’t identify the person but found he received a call just before withdrawing. Examining the sub-broker’s call records, SEBI found he had received a call exactly at that time. His mobile location too was in that area.
SEBI believed this was enough preliminary evidence to pass an urgent ex-parte interim ruling. It debarred the parties from being associated with capital markets till further directions. It required them to deposit in an escrow account the illicit profits of about Rs 58 lakh. It froze their bank/demat accounts. They are given a post-order opportunity to reply to the allegations. If eventually found guilty, they could face debarment from capital markets, disgorgement of illicit profits, penalty up to Rs 25 crore, and possibly prosecution. Their employers may also initiate action.
To be sure, at this stage, these are allegations, even if supported by extensive evidence. The ruling is ex-parte with parties not given a prior chance to respond. The use of CCTV footage, mobile location, etc. is innovative but could be questioned on several grounds. The onus will be on SEBI to establish front-running. On other hand, this onus is not very high. It is well-settled by Supreme Court’s rulings that in such cases, SEBI has to only establish that it is more probable that the parties are guilty than not.
SEBI’s action is also commendable considering the scant regulatory base of just one clumsily drafted clause for front-running. The gaps are partly filled by a Supreme Court decision and a SEBI circular. Even with these limitations, this is one more ruling against front-running, the immediate earlier being in case of dealers of Reliance Securities.
This does not mean that front-running will come to an end. The modus operandi used here seems amateurish. Sophisticated players with higher stakes may leave far lesser trails. Yet, this ruling could only be the starting point of further innovative initiatives. The thief may be able to remain barely ahead in the race with the proverbial cop.
Jayant Thakur is a chartered accountant. Views are personal.
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