Sebi's front-running investigations rise even as overall cases dip

More probes were completed than in the previous year

Investigations into front running increased even as the number of probes into other violations specified in the prohibition of fraudulent and unfair trade practices (PFUTP) regulations decreased.

The PFUTP rules cover violations like price manipulation, accounting fraud, and fraudulent accounting practices, in addition to front-running.

Stock market regulator Securities and Exchange Board of India (Sebi) took up more front-running investigations and also recorded higher completion rates in financial year ending 2021-22 (FY22), shows an analysis of data from its annual report released earlier this month. The number of front-running cases taken up rose from one to seven. Completed cases rose from two to eight (chart 1).

The total number of completed FUTP investigations rose from 46 to 82 between FY21 and FY22. The number of new cases taken up for investigations dropped from 41 to 38 in the same period (chart 2).

In a recent front-running case involving the trades of six entities of Deutsche Mutual Fund, Sebi imposed a penalty of Rs 15 lakh.

The regulator took up fewer investigations overall at 59 new cases in FY22 (including FUTP and other violations), compared to 94 in FY21. The number of completed investigations rose to 169 in FY22 from 140 in FY21.

The annual report noted that the systems to detect such violations were in place, which helped in enforcement.

“Sebi has robust in-house alert systems in place to monitor activities across market segments and exchanges so as to check unfair trade practices including insider trading…after completion of investigation, enforcement action is initiated wherever violations of securities laws are observed,” it said.

The apex court has ruled against Sebi in recent matters, which may require it to review its investigation process and have a clearer position on dealing with certain violations and the penalties it charges for them, said Harish Kumar, partner at Luthra and Luthra Law Offices.

“With the recent setback from judgments of the Supreme Court in certain cases, it appears that Sebi has been conducting its internal investigation and exercising its adjudication power excessively…,” he said.

“Orders by the Supreme Court are the law of the land. At Sebi, we have to introspect and interpret. We need to review the process and we may also need to review our legislations because these were written 20-25 years back and the communication channels have now advanced,” Sebi Chairperson Madhabi Puri Buch said after the board meeting last month.

Meanwhile, adjudication proceedings against 1,005 entities were completed for engaging in fraudulent and unfair trade practices and penalties worth Rs 197.33 crore were levied. For insider trading violations, adjudication proceedings against 20 entities were completed and penalties worth Rs 2.88 crore were imposed. For takeover related violations, proceedings were initiated against 59 entities, and Rs 25.68 crore in penalties were imposed. There was another Rs 2.68 crore levied for disclosure violations and Rs 24.96 crore for various other transgressions.

By the end of the previous financial year, Sebi had 1,149 cases pending in courts, of which 1,043 cases were older than two years.