SEBI: Placing Orders in Single/Multiple scrips Having Non-Public Information Violates Market Regulation

SEBI: Placing Orders in Single/Multiple scrips Having Non-Public Information Violates Market Regulation

The Securities Exchange Board of India (SEBI) while imposing a penalty of Rs. 15 lakh on father-son duo Bhupendra Jasvantrai Parekh (Noticee 2) and Ketan Bhupendra Parekh (Noticee 1) for earning unlawful gains from front-running trades via Quest Investment Advisors Pvt Ltd (Quest) observed, there cannot be a single test to determine 'substantial' order, a substantial order is one which in the estimation of a reasonable person, would impact the price of the securities concerned on being placed in the order book of the stock exchange. When it is only the estimation of reasonable person then even the assessment of actual impact of such substantial order is not necessary to determine the substance of the order.

The present proceedings emanated from a Show Cause Notice (SCN) issued to Noticees to ascertain whether the Noticees had front run the trades of Quest Investment Advisors Private Limited (hereinafter referred to as "Quest"), a SEBI registered Portfolio Manager, in contravention of the provisions of SEBI Act, 1992 read with SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 (PFUTP Regulations, 2003).

Quest is a SEBI registered Portfolio Manager providing portfolio management services. During the investigation period, it was observed that Noticee 1, was the dealer of Quest and had the authority to place orders for sale/buy of shares on behalf of Quest and placed orders on behalf of Quest. Noticee 1 confirmed in his statement recorded before the Investigating Authority that he had the knowledge of the trades to be executed on behalf of Quest as he was a dealer of Quest who used to place order on behalf of Quest.

It was alleged that the front running trades by the Noticees resulted in wrongful gain / loss aversion of Rs 22,88,126/- for Noticee no. 2. The SCN alleged that the Noticees violated provisions of Sections 12A (a), (b) and (c) of SEBI Act, 1992 and Regulations 3(a), 3(b), 3(c), 3(d), 4(1) and 4(2)(q) of PFUTP Regulations, 2003.

The Noticee had contended in his statement before the Investigating Authority was made based on cryptic information without any understanding of 'front running' and the questions put before him were framed without explaining the nature and definition of 'front running' or the features of Regulation 4(2)(q) of PFUTP Regulations, 2003 which has been used to charge him.

SEBI observed that in 81 instances when a bulk buy order was about to come from Quest, buy trades were executed from the trading account of Bhupendra Parekh just before the buy order of Quest, and the sell order was placed just before or after Quest's order to square off his position to earn profits.

The Board noted that Noticee No. 1 working as a dealer with Quest, a registered Portfolio Manager and his role required understanding the market concepts, market conduct and general terms used in the market. Noticee no. 1 further claimed that he was knowledgeable about market functioning and its trends and therefore, used to handle his father's trading account. Therefore, the Board opined that it was reasonable to infer that Noticee no. 1 was aware of what 'front running' means.

The Board pursued Regulation 4(2)(q) of the PFUTP Regulations, 2003 and stated, "Regulation 4(2)(q) of the PFUTP Regulations, 2003 has been amended to explicitly provide for inclusion of any order in securities by a person, whether intermediary or not, while in possession of non-public."

Noticee no. 1 had contended that the number of orders from Quest were in a number of scrips whereas Noticee no. 2 trade in only a few scrips, the trades from Quest were delivery based while Noticee no. 2 traded intra-day, the volume of Quest trades was in the range of Rs. 2000 crores while volume of Noticee no. 2 was around Rs. 75 crores and Noticee no. 2 has not traded on all days/scrips on which Quest traded and therefore matching of some or even 100% of volume of Noticee no. 2 with Quest cannot be per se treated as objectionable and liable for disgorgement.

The Board found Noticee No. 1 had violated Regulation 4(2)(q) of the PFUTP Regulations, 2003, which declares placing of order by a person in securities while directly or indirectly in possession of information that is not publicly available regarding substantial impending transactions in those securities, as manipulative, fraudulent or unfair trade practice.

The Board observed that placing order in a single scrip or multiple scrips while in possession of any non-public information about an impending substantial order in such single scrip or multiple scrips, is in violation of Regulation 4(2)(q) of PFUTP Regulations, 2003.

"Therefore, the contention of Noticee no. 1 that he traded only few of the scrips whereas Quest's substantial orders were placed in a number of scrips is untenable. Also, the assertion that the trades of Quest were delivery based whereas Noticee no. 1 used to trade intraday does not make the acts of Noticee no. 1 in consonance with Regulation 4(2)(q) of PFUTP Regulations, 2003. In terms of Regulation 4(2)(q) of PFUTP Regulations, 2003 mere placing of order is sufficient irrespective of squaring off transactions or delivery-based transactions to attract the vices of Regulation 4(2)(q) of PFUTP Regulations, 2003. Similarly, the rigors of Regulation 4(2)(q) of PFUTP Regulations, 2003 stand attracted irrespective of the fact that second leg of front runner's transaction, i.e., sell order in Buy-Buy-Sell pattern and buy order in Sell-Sell-Buy, did not match with the substantial order of the Big Client," held the Board.

The Noticee no. 1 had contended that information about forthcoming buy/sell orders of scrips in/of a private limited company such as Quest do not come within the sweep of definition of front running. SEBI noted in terms of Regulation 4(2)(q) of PFUTP Regulations, 2003 status of the person (listed of unlisted) placing substantial orders is not material. However, the substantial order must be in the securities which are listed. In the present case, the allegation against Noticee no. 1 is that he placed orders in securities which are listed on stock exchanges based on non-public information regarding substantial impending orders in such securities. Therefore, SEBI remarked the contention made by the Noticee as 'untenable.'

The Board reckoned that any dealing in securities falling under Regulation 4(2)(q) of PFUTP Regulations, 2003, is per se manipulative, fraudulent or unfair trade practice. Once an act has been found to be manipulative, fraudulent, or unfair trade practice within the meaning of PFUTP Regulations, 2003 then identification of victims or the persons who may have suffered losses due to such acts, is not necessary. The acts prohibited under Regulation 4(2)(q) of PFUTP Regulations, 2003 are qua the securities market at large.

Thus, the Board in view of the aforesaid findings directed the Noticee No.1 and Noticee No. 2 to disgorge the amount of Rs. 22,88,126 along with an interest at the rate of 12 per cent per annum and barred Ketan for 2 years and Bhupendra for 3 months from dealing in the market.