Market regulator Sebi intensifies drive against front-running violations

Conducts search and seizure operations against some experts who appeared on TV channels

The Securities and Exchange Board of India (Sebi) has intensified its drive against alleged violations of front-running regulations—considered one of the most serious stock market offences. In its latest action, the securities regulator on Thursday carried out search and seizure operations against market experts doling out stock advice on business news channels.

The move follows a series of actions taken by Sebi in the recent past against mutual fund and broking officials as well as TV anchors and connected entities.

In the latest search at official and residential premises of six entities, Sebi seized records including mobile phones, laptops, desktops, tablets and hard drive disks to retrieve data for examination. The searches were carried out in Kolkata, Jaipur, Noida, and Pune.

Sources said Sebi will conduct a detailed examination of the data, emails and other documents. It may even pass ex-parte orders if it feels the market’s integrity was compromised by some of the alleged wrongdoers.

Sebi’s action was initiated based on surveillance inputs and internal alert system, said people in the know.

In the latest instance, the modus-operandi of those involved included taking positions in stocks just before making recommendations on TV channels, and later squaring off the positions at a profit when investors looked to act on the advice.

Such front-running constitutes a violation under the Sebi (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003, said a legal expert.

“The scope of [the] regulations was broadened to prohibit front-running by non-intermediaries and individuals, with effect from February 1, 2019. The offence attracts a penalty which may extend to Rs 25 crore, or three times the amount of profits made out of such practice, whichever is higher, upon conviction,” said Aman Avinav, partner – dispute resolution, Phoenix Legal.

Last year, Axis Mutual Fund had terminated two fund managers for alleged breach of securities law.

The legal fraternity said Sebi’s drive would send a strong signal to the market. However, they were of the opinion that such cases could be challenged legally.

Experts believe it would be difficult for legal authorities to establish that the stock advice given on TV can indeed move the markets. In the past orders passed in similar matters, the regulator had done a thorough analysis of the time such advice was telecast, the spike in trading volumes, and the movement in price.

However, the regulator has faced challenges before the Securities Appellate Tribunal (SAT), which entertains appeals by parties aggrieved by Sebi action.

In August, SAT had set aside a ban imposed by Sebi on a TV anchor for alleged involvement in fraudulent trading practices. The interim order was issued by Sebi in January 2021. In October 2021, the regulator had barred another news anchor for similar violations.

According to data for FY22, front-running cases accounted for the largest share of regulatory investigations into violations of the PFUTP regulations.

“In a market like India, where business news channels still hold dominance over securities-related recommendations for a large section of people, it can be seen as a necessary action from the regulator. Considering previous cases, this action by Sebi does not seem to come out of the blue,” said Siddharth Mody, senior partner at Desai & Diwanji.

Sebi’s annual report had noted that the systems to detect such violations were in place, which helped with enforcement. The total number of completed FUTP investigations, including front-running as well as other violations, rose from 46 to 82 between FY21 and FY22. But, the number of new cases taken up for investigations dropped from 41 to 38 in the same period.