A January 2 interim order by capital markets regulator, the Securities and Exchange Board of India (Sebi), has reignited memories of the infamous market manipulation that took place in the late 1990s and early 2000s. The investigation found that former stockbroker Ketan Parekh-one of the main accused in the 1999-2001 market manipulation scam-was allegedly involved in a front-running scam. Front-running is an unethical practice. It involves the use of confidential information about pending transactions by traders or brokers to profit unfairly by taking advance positions. This is a violation of Section 12A of the Sebi Act and the Sebi (Prohibition of Fraudulent and Unfair Trade Practices) Regulations, 2003.
Parekh’s manipulation of the stocks in the late ’90s led to the subsequent market crash. A group of 10 stocks-which were mostly from information technology, communication, and entertainment sectors-were favoured by Parekh. They rose sharply, but crashed in 2001. Parekh was later exposed for market manipulation.
Parekh, once an associate of Harshad Mehta, has been once again accused of orchestrating front-running trades of a "big client" through a sophisticated network, Sebi’s 30-month investigation, from January 2021 to June 2023, revealed.
This isn’t an isolated incident. Recently, Sebi barred a PNB MetLife Insurance equity dealer for front-running. In 2023, it conducted search-and-seizure operations at Quant Mutual Fund and barred 21 entities, including former Axis Mutual Fund chief dealer Viresh Joshi, for similar activities. Earlier, Life Insurance Corporation of India employee Yogesh Garg faced action for the same and was later dismissed from services. Parekh’s case is unusual because Sebi appointed joint investigation authorities. Sidharth S. Kumar, Senior Associate at law firm BTG Advaya, explained that such a move underscores the scale of the fraud Parekh, and his associates are accused of committing.
According to Sebi, Parekh collaborated with Rohit Salgaocar, an authorised signatory of Singapore-based Strait Crossing Pte Limited (SCPL). Salgaocar allegedly passed confidential information about client trades to Parekh, who directed six front-runners to execute trades based on this information. According to Salgaocar, nearly 90% of the client’s trades were done by Parekh alone. Salgaocar, despite conducting due diligence, limited his checks to whether Parekh was officially barred from India’s securities market. Sebi suspected that front runners used complex trading strategies and received specific and timely instructions from Parekh through WhatsApp chats or calls. Parekh was using multiple contact numbers in the name of different persons in order to disguise his identity.
Sebi also uncovered that SCPL had revenue-sharing agreements with financial services companies Nuvama and Motilal Oswal. The agreements were for the brokerage earned on trades of the big client referred by SCPL, though the brokers were unaware about their systems being exploited.
Sebi introduced several measures in the past, including mandatory recording of communications between fund managers and intermediaries. Last year, Sebi made policy changes to the mutual funds regulations. These measures included establishing an institutional mechanism for handling confidential information related to funds and trading activities and establishing whistleblower policies to report intermediary misconduct.
However, the violations by Parekh and others accused reveal that front-running extends beyond the mutual funds industry and that habitual offenders like Parekh require stronger regulatory measures. “Sebi should frame regulations to deal with habitual offenders that are proportional, bereft of loopholes, and withstanding judicial scrutiny,” Kumar said.
Shiju PV, Senior Partner at law firm IndiaLaw LLP, suggested deploying advanced trade surveillance mechanisms powered by artificial intelligence to detect illicit activities. He said that an effective whistleblowing mechanism is also essential to facilitate the detection of market abuse and ensure whistleblower protection.
Sebi’s order represents a preliminary view of the alleged offences. According to Navneet Gupta, Partner at law firm SNG & Partners, Sebi has issued a show-cause notice and impounded the alleged gains. “He may thus choose to appear before Sebi and file a detailed reply along with evidence or file an appeal against the impounding of money and restraint against trading in the securities market,” Gupta said.
According to Sanjay Basu, Founding Partner at law firm AQUILAW, Parekh and others have 21 days to respond to Sebi. If dissatisfied, they may escalate the matter to the appellate authority and would also be provided with an opportunity of personal hearing, Basu further explained.
Ketan Parekh’s alleged return to market manipulation highlights systemic vulnerabilities and the need for a comprehensive approach to tackling unfair trade practices. Sebi must leverage advanced technology, strengthen whistleblower mechanisms, and enhance its regulatory framework to deter habitual offenders and maintain market integrity.
Kumar highlighted the role of Angadias-informal cash transfer networks-in Parekh’s alleged scheme, which harks back to the dabba trading practices. “Technology alone won’t deter such traditional methods. Sebi must revamp its informant scheme to cover all violations,” he said.