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The Securities and Exchange Board of India (Sebi) plans to review the regulations that govern front-running, to strengthen these, after a recent ruling by the Securities Appellate Tribunal (SAT) set aside its order on individuals on this count.
The tribunal overruled Sebi’s order on the grounds that the regulations only apply to market intermediaries and not individuals.
Front-running is an unethical practice of executing trades based on confidential information, to make profits. It is prohibited under Sebi’s Fraudulent and Unfair Trade Practices (FUTP) Regulations.
In 2009, Sebi had passed an interim order that barred three individuals from the securities market and imposed penalties on them for their alleged front-running. An investigation had found Kanaiyalal Patel and Anandkumar Patel had traded on information from their cousin, Dipak Patel, who was working at Passport India Investment (Mauritius), on forthcoming trades by his organisation, to make a profit of Rs 1.56 crore.
Earlier this month, the order against these individuals was set aside by SAT.
The appellate body’s ruling that the FUTP Act cannot be applied for front-running by individuals, has legal experts divided.
While some believe SAT’s judgement is ‘flawed’, as it has only looked at the section meant for intermediaries and even individuals are covered under different sections, others say the FUTP Regulations, 1995, prohibits front-running by individuals, while the FUTP Regulations, 2003, prohibits it only by intermediaries.
“Front-running as an offence is pursued to be for intermediaries. So, will somebody who is an indirect beneficiary, fall under the purview? Common sense and justice demand that they should,” said Sinha.
“Given this particular example, we will need to have a serious look at our regulation,” he added
“It makes no logical sense to restrict the securities anti-fraud rule (even if one) to apply only to intermediaries and that too, registered intermediaries. The point is to protect investors, not punish wrongdoers if they wear a particular hat,” said Sandeep Parekh of Finsec Law Advisors.
According to legal experts, the regulator should appeal against the SAT’s ruling, so that it doesn’t set a precedent.