SEBI bars 12 entities for 5 years in front-running case; imposes Rs 90 lakh fine

The Securities and Exchange Board of India (SEBI) has cracked down on a major front-running ring, barring 12 entities from the securities market for five years. 

In a final order passed on Friday, the capital markets regulator also slapped a cumulative penalty of Rs 90 lakh on the noticees and directed them to disgorge illegal gains amounting to over Rs 1.07 crore.

The case revolves around the front-running of trades belonging to a big client, Paresh N Bhagat, the Chairman and Managing Director of Mangal Keshav Financial Services LLP (MKFS). 

Dealers Ashish S. Parekh and Rajesh Joshi, who were employed at MKFS and handled the trades for Bhagat. According to SEBI’s findings, these dealers—labelled as Information Carriers (ICs)—abused their position by passing on non-public information (NPI) regarding substantial impending orders.

This confidential data was tipped off to a network of front runners, which included family members and connected entities. The regulator noted that the entities executed trades in a synchronised manner, typically following a Buy-Buy-Sell (BBS) or Sell-Sell-Buy (SSB) pattern. They would position their orders just ahead of the big client’s large trades, profiting from the subsequent price movement caused by the bulk orders.

SEBI whole-time member Kamlesh C. Varshney, in his order, remarked, "The Noticees utilised information which was not available with the general public for their personal benefit and made ill-gotten gains... this act of noticees is an act of fraud."

The regulator has imposed strict monetary penalties under Section 15HA of the SEBI Act. Rs 15 lakh each was levied on the primary dealers, Ashish S Parekh and Rajesh Joshi.

Rs 10 lakh each is imposed on Nagendra S. Dubey and Chirag Atul Pithadia, who acted as conduits and dealers facilitating the front-running trades.

Rs 5 lakh each: Slapped on eight other entities, including Dipa Ashish Parekh, Kashmira Joshi, and various HUF accounts utilised for the scheme.

In addition to the ban and penalties, the entities have been ordered to disgorge Rs 1,07,61,609 in unlawful gains, along with 12% interest calculated from the time the profits were earned. The regulator permitted the utilisation of approximately Rs 1.25 crore already impounded in escrow accounts under a previous interim order to settle these dues.

The order restrains ten of the entities, including Ashish Parekh and Nagendra Dubey, from the markets for five years starting from the interim order date of December 26, 2022. Two other noticees, Kashmira Joshi and Rajesh Joshi, face a fresh five-year debarment effective from the date of this final order.

Proceedings against one noticee, Sushma Nagendra Dubey, were abated following her passing, though the liability for disgorgement was transferred to her legal heirs.