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The Securities and Exchange Board of India (SEBI) recently concluded an 18-month investigation into a sophisticated front-running scheme involving convicted market manipulator Ketan Parekh and Singapore-based trader Rohit Salgaocar. The investigation revealed a complex network leveraging confidential, non-public information (NPI) about a substantial US-based foreign portfolio investor's (FPI) trading activity, referred to as the 'Big Client'. This scheme resulted in illicit profits totaling ₹65.77 crore, prompting SEBI to take swift and decisive action against the individuals and entities involved.
The scheme's modus operandi involved a carefully orchestrated flow of information. Rohit Salgaocar, acting as the linchpin, allegedly obtained NPI regarding the 'Big Client's' impending trades. This information was then relayed to Ketan Parekh, who, despite a previous 14-year ban from the securities market for his role in the 2001 stock market scam, directed a network of six entities, termed 'frontrunners,' to execute trades based on this insider knowledge. These frontrunners included brokerages like GRD Securities Ltd and Salasar Stock Broking Ltd, and individuals such as Anirudh Damani and his uncle Ashok Damani. The communication channels used were covert, with WhatsApp messages and calls utilizing coded names like 'Jack' and 'Boss' to mask the illicit nature of the transactions. This intricate network highlights a worrying sophistication in market manipulation techniques.
The investigation meticulously tracked the flow of information and the execution of trades. The 'Big Client' placed orders through intermediaries like Nuvama Wealth Management Ltd and Motilal Oswal Financial Services Ltd, making their confidential data vulnerable to exploitation. Salgaocar, who had a referral agreement with Motilal and Nuvama, strategically directed the 'Big Client's' trades through these firms, allowing him to simultaneously monitor order execution via Bloomberg chat and instruct the traders. The frontrunners, acting on Parekh's instructions based on the NPI, executed trades in advance of the 'Big Client's' orders, generating substantial profits. The overwhelming majority of these trades (over 98% by trade value and approximately 97% of total profits) occurred in the cash market, showcasing a deliberate strategy to maximize gains and minimize detection.
SEBI's investigation uncovered compelling evidence of unlawful profit-sharing among the conspirators. Salgaocar allegedly earned approximately ₹27.07 crore in referral fees, while the frontrunners amassed ₹38.7 crore in unlawful gains. The total illicit profits generated by the 22 individuals and entities named in the interim order amounted to ₹65.77 crore. The investigation also revealed that the strategies employed by the frontrunners went beyond traditional front-running, involving more sophisticated techniques and careful coordination to maximize profits while minimizing risk. SEBI's rigorous examination of financial records, electronic communications, and sworn statements solidified its case against those involved.
In response to its findings, SEBI issued show-cause notices to Salgaocar, Parekh, the six frontrunners, and fourteen other individuals and senior executives. As an immediate measure, SEBI impounded the ₹65.77 crore in unlawful gains and barred Parekh, Salgaocar, and Ashok Poddar from trading in securities or associating with any SEBI-registered intermediary. Furthermore, SEBI instructed banks to freeze debits from the implicated entities' accounts, permitting only transfers to designated accounts for the recovery of the illicit profits. The noticees have been given 21 days to respond to the show-cause notices, following which SEBI will issue a final order. Any party dissatisfied with the final order retains the right to appeal to the Securities Appellate Tribunal. The outcome of this case will set a significant precedent in SEBI's ongoing battle against market manipulation and insider trading, underscoring the regulator's commitment to protecting the integrity of India's capital markets and punishing those who undermine it.
This case highlights the increasing sophistication of market manipulation schemes and the challenges faced by regulators in detecting and prosecuting these crimes. The use of coded communication, offshore entities, and strategic partnerships with brokers demonstrates a calculated effort to evade detection. The success of SEBI’s investigation underscores the importance of robust regulatory oversight, technological advancements in monitoring market activity, and international cooperation in combating cross-border financial crime. Future investigations will likely focus on similar sophisticated schemes and highlight the need for ongoing vigilance and adaptation by regulatory bodies to maintain the fairness and integrity of the financial markets.
Source: Mint Explainer: Why did Sebi crack down against Ketan Parekh and Rohit Salgaocar?