Limited cases of front-running taken up for scrutiny in 2020-21 amid Covid

The category accounts for under 5% of probes completed during the year, and under 3% taken up for scrutiny, shows an analysis of data from Sebi's last available annual report

Front-running cases have invited limited regulatory scrutiny, accounting for a minority of such investigations.

There was only one case taken up and two completed in 2020-21, shows data from the Securities and Exchange Board of India’s last available annual report. This means that the category accounts for less than 5 per cent of investigations completed during the year, and under 3 per cent of cases taken up for investigation, shows an analysis of the data (see chart 1).

Front running is when an entity looks to profit from the price move caused by a large order, illegally using confidential order information to their own benefit. Institutions like mutual funds place large orders given the size of their funds. Those who know that a large order is coming can take a position ahead of it to benefit as the prices often change significantly once the order is executed.

The stock market regulations prohibit this under the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003.

“Dealing in securities shall be deemed to be a [manipulative] fraudulent or an unfair trade practice if it involves… any order in securities placed by a person, while directly or indirectly in possession of information that is not publically available, regarding a substantial impending transaction in that securities, its underlying securities or its derivative,” it said.

The smaller share of such investigations gains significance in light of allegations of front running at Axis Mutual Fund. While the regulator has not come out with an order on the matter, it has previously investigated cases involving the Fidelity group and HDFC Asset Management, as per its previous annual reports.

Axis has indicated that it is investigating a matter involving certain members of its team in a process which started in February 2022.

“….two fund managers have been suspended pending investigation of potential irregularities. We have taken compliance with applicable legal/regulatory requirements seriously, and have zero tolerance towards any instance of non-compliance,” said its statement on May 6th.

It subsequently shared that it had terminated its chief trader and fund manager Viresh Joshi on May 18th.  Another statement on May 20th said that it had terminated fund manager Deepak Agrawal.

Meanwhile, the pandemic has also had an effect on the total number of investigations across categories. Total cases taken up dropped from 161 in 2019-20 before the pandemic took hold, to 94 in 2020-21. Investigations completed dropped from 170 to 140 in the same period (see chart 2).

The regulator has mentioned that it is looking to step up scrutiny using more advanced technology to catch culprits.

“The future of surveillance will entail further deployment of technology to detect more complex and evolving manipulation techniques by fraudsters. It is envisaged that use of enhanced technology will aid Sebi in better identifying abnormal or fraudulent behaviour in the market including front running and insider trading. Technology will be used to simulate human intelligence to further refine its alerts system,” it said.