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SEBI banned eight entities and seized Rs 4.82 crore for front-running trades involving Gagandeep Consultancy. Let’s understand what front-running is and why it violates SEBI rules
Front-running is an illegal stock market practice where an entity conducts transactions based on non-public information. (Representative/Shutterstock)
In a tough stance against ‘front-running’, the stock market regulator, the Securities and Exchange Board of India (SEBI), has banned eight entities from the securities market and seized Rs 4.82 crore allegedly earned through these illicit activities.
‘Front-running’ is an illegal stock market practice where an entity conducts transactions based on non-public information received from a broker or analyst.
SEBI initiated this action after an investigation in respect of the alleged front-running of the trades of Gagandeep Consultancy Private Limited (a significant client) by certain entities. SEBI’s investigation spanned from September 2018 to September 2023.
The investigation aimed to determine whether the entities violated PFUTP (Prohibition of Fraudulent and Unfair Trade Practices) rules during the period from September 2018 to September 2023.
What is Front-Running?
Front-running, an illegal stock market activity, is also known as forward running. In this practice, a broker with access to confidential, market-moving information uses it for illegal financial gain. These individuals secure positions in a security based on the knowledge of a large, non-public order that will impact the price of the security and profit once the large order is executed. Ordinary investors suffer substantial losses due to such illicit activities.
For example, the broker might buy shares of Stock X before executing the client’s purchase. This act gives them an unfair advantage, akin to insider trading, as they capitalise on a price movement unknown to other market participants.
When the client’s large order is executed, it boosts demand, driving up the price of Stock X. The broker, having already purchased shares, sells them at the inflated price, profiting unethically. Such practices erode market integrity and diminish investor trust.
Front-running is particularly common when a trader knows about large upcoming orders from clients, if someone has advance knowledge of upcoming analyst recommendations, or if a broker-dealer trades ahead of their own customers.
The practice is illegal in most jurisdictions because it breaches fiduciary duty to clients, violates market fairness principles, it is considered to be a form of insider trading and it reduces market efficiency and trust.
Trading firms and regulators use sophisticated surveillance systems to detect patterns that might indicate front-running. Penalties can include fines, trading bans, and even criminal charges in severe cases.
What Did SEBI State in its Order
In its interim order, SEBI stated that Ashish Kirti Kothari, his family members, and his HUF (Hindu Undivided Family) are accused of engaging in front-running deals involving substantial clients.
It was observed that the major client placed orders through stockbroker Nirav Mahendra Sapani, a dealer at Anvil Share & Stock Broking Private Limited.
Sapani acted as an information carrier, passing insider details about the client’s trades to Ashish Kirti Kothari and his associates. Using Krishna Tukaram Kadam’s accounts, they executed front-running trades.
The operation involved Ashish and his associates placing trades ahead of the client’s orders using confidential information. Profits were shared among the parties, with Sapani facilitating the trades and Kadam’s accounts used for execution and laundering the illegal gains.
SEBI asserted that these entities violated several provisions of the SEBI Act by participating in such transactions. Consequently, the eight entities have been prohibited from buying, selling, or dealing in securities until further notice.
