SEBI in its recent interim order disclosed shocking information regarding a front-running scheme planned by high-profile individuals, including Rohit Salgaocar and Ketan Parekh, along with several entities.
This scandal involved unlawful gains from non-public information (NPI) which threw a light on the vulnerabilities within the securities market and its impact on retail traders and investors.
Let’s delve into what happened, how it affects you as an investor, and the lessons this episode offers.
What is Front-Running?
Let’s begin with understanding the meaning of front-running is a fraudulent practice where individuals or entities trade in securities based on advanced knowledge of large, pending orders of clients.
This allows them to profit from the market movements triggered by these trades, often at the expense of other market participants. It is strictly prohibited under SEBI’s Prohibition of Fraudulent and Unfair Trade Practices (PFUTP) Regulations, 2003.
Now let’s get into the details of how this scandal was executed and what did SEBI uncover.
The Fraud Unveiled: Who’s Involved?
SEBI’s investigation into trades conducted between January 2021 and June 2023 exposed a well-coordinated front-running operation. Here are the key players:
- Rohit Salgaocar (Information Carrier)
- A Singapore-based individual who had access to NPI (Non-Public Information) from a foreign portfolio investor (FPI), referred to as the “Big Client.”
- Shared confidential details of the pending trades of Big Clients with other associates.
- Ketan Parekh (Mastermind)
- A former stock market manipulator who was banned by SEBI in 2003.
- He allegedly received NPI from Salgaocar and passed trading instructions to his network of “front-runners.”
- Front-Runners (FRs)
- Entities like GRD Securities Limited and Salasar Stock Broking Limited executed trades based on Parekh’s instructions.
- Individuals such as Anirudh Damani and Ashok Kumar Damani played crucial roles in executing trades in their accounts.
- Facilitators
- Directors and employees of broking firms enabled these trades by lending accounts and trading terminals.
How did the Scheme Work?
The operation’s modus operandi reveals a chilling level of sophistication:
- Acquiring NPI: Salgaocar obtained details of the Big Client’s pending orders, such as stock names, quantities, and prices.
- Distributing NPI: Parekh then distributed the information on Whatsapp contacts saved with the name “Jack” and “Boss”.
- Executing Trades: Front-runners executed trades ahead of the Big Client’s orders, profiting from the price movements caused by the large orders.
Evidence Collected by SEBI
SEBI did an in-depth investigation and found some of the evidences like:
- WhatsApp chats containing detailed trading instructions.
- IP address logs that confirmed communication between Salgaocar and Parekh.
- Matching trade patterns between front-runners and the Big Client’s orders.
- Call data records and electronic devices that were seized during search operations.
The Financial Impact: How Much Was at Stake?
The scheme’s financial impact is shocking:
- Unjust Profits: By exploiting NPI data, the entities and individuals involved made unlawful money equal to ₹65,77,11,547.
- Market Disruption: The coordinated trades manipulated stock prices, raising questions about the fairness and efficiency of the market.
While SEBI’s interim order has frozen the assets of those involved, the impact of such frauds and scandals is much bigger than it seems, affecting retail traders the most.
How Does This Affect Retail Investors?
Front-running schemes like this have a profound impact on retail traders and investors:
- Erosion of Trust:
- Scandals undermine confidence in the market’s integrity, creating hesitation among new traders and investors to join the market.
- Distorted Prices:
- Manipulated stock prices can lead to losses for unsuspecting retail investors who enter trades at artificially inflated or deflated prices.
- Unfair Playing Field:
- Retail investors lack access to the information and resources available to institutional clients, leaving them at a disadvantage.
- Systemic Risks:
- Repeated instances of market manipulation can deter foreign investments, impacting overall market stability and growth.
SEBI’s Response: Protecting Investors
In response to this case, SEBI has taken several steps:
- As per the SEBI’s interim order, the regulatory body has prohibited all entities and individuals from accessing the stock market.
- Also, it has frozen assets to reimburse the unlawful gains.
- SEBI has demanded explanations from the accused on why further action should not be taken
- Last but not least, the regulatory body has strengthened surveillance mechanisms to detect unusual trading patterns.
While these measures are commendable, they highlight the need for continuous awareness to protect retail investors from similar scams.
Lessons for Retail Investors
As a retail investor, here’s what you can learn from this episode:
- Stay Informed: Keep yourself updated on regulatory developments and market practices to identify red flags.
- Diversify Investments: Spread your investments across asset classes and stocks to mitigate risks from market manipulation.
- Leverage Technology: Use tools and platforms that provide real-time market data and analysis to make informed decisions.
- Report Suspicious Activities: If you suspect fraudulent activities, report them to SEBI via its SCORES platform.
- Educate Yourself: Attend webinars and read about trading ethics, market regulations, and fraud prevention strategies.
Conclusion
This front-running scandal is a wake-up call for all market participants. While regulatory bodies like SEBI play a crucial role in maintaining market integrity, retail investors must also take proactive steps to safeguard their interests.
The fight against market manipulation is ongoing, but by staying vigilant, informed, and disciplined, you can navigate the stock market with confidence and resilience.
