SEBI Penalises 13 Entities for Front-Running Trades Using Non-Public Information

SEBI Penalises 13 Entities for Front-Running Trades Using Non-Public Information

Front-running in the securities market refers to an unfair trading practice where a person (like a broker, trader, or insider) uses confidential or non-public information about an upcoming large trade to make personal profits before that trade is executed.

Let us understand:

If a trader knows that a big institutional investor (like a mutual fund or FIIs) is about to buy or sell a large quantity of shares, they buy or sell those shares in advance to benefit from the expected price movement caused by that big order.

Example:

Suppose a broker knows that their client will soon place a large order to buy shares of Company X. The broker secretly buys shares of Company X before executing the client’s order. Once the client’s big order pushes up the share price, the broker sells at a profit.

Why illegal:

•  It violates market fairness.

• It creates unequal access to information.

• It undermines investor trust and distorts price discovery.

SEBI’s stance:

The Securities and Exchange Board of India (SEBI) treats front-running as a fraudulent and unfair trade practiceunder its Prohibition of Fraudulent and Unfair Trade Practices (PFUTP) Regulations. Penalties can include market bans, monetary fines, and even prosecution.

Present Order

In a strong message against market manipulation, the Securities and Exchange Board of India (SEBI) has penalised 13 individuals and Hindu Undivided Families (HUFs) for engaging in front-running trades using non-public information. The regulator imposed monetary fines ranging from ₹5 lakh to ₹15 lakh and barred them from accessing the securities market for one to three years.

The Case: Unfair Advantage from Inside Information

SEBI’s investigation revealed that the noticees had traded in common scrips associated with a “Big Client”, which was a family trust, ahead of the client’s large orders. By doing so, they earned abnormal profits based on advance knowledge of impending trades — a clear act of front-running.

A significant drop in their trading profits was observed after SEBI initiated queries with the Big Client on June 29, 2022, confirming the connection between their trading activity and access to sensitive information.

Pattern of Collusion and Connectedness

According to SEBI’s 82-page order authored by Santosh Shukla, the entities displayed a “clear connectedness and behavioural consistency.”

Several admitted that their accounts were used by the key conspirator.

Some traded through spouses’ or HUF accounts, while others allowed access to their trading accounts for executing non-genuine trades.

Shukla described the pattern as a “classic example of non-genuine trading motivated by greed for easy profit.”

Key Findings and Regulatory Observations

The order observed that:

• The conduct of the noticees distorted normal market forces and undermined market integrity.

• Unequal access to confidential information erodes investor confidence and violates the principles of fair play.

• The trading behaviour — frequent calls, coordinated trades, and unrealistic intraday activity — pointed to deliberate manipulation.

SEBI noted that such actions constitute fraudulent, manipulative, and deceptive dealings, contrary to the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices) Regulations.

Penalties Imposed

The highest penalty of ₹15 lakh was levied on Chaitali Shah, followed by ₹12 lakh each on Shah Swapnil Uday HUFand Piyush Mehta HUF.

Other penalties included:

₹10 lakh each – Shankar Tukaram Vadatkar, Dipesh Mehta HUF, and Hansraj Randhir Shah HUF.

₹5–₹8 lakh – Sakshi Vadatkar, Randhir Virji Shah HUF, Pinakin Hansraj Shah HUF, Punaiben Hansraj Shah, Raahul Hansraj Shah HUF, Ankesh Mahendra Jain HUF, and Dr. Kumaraswami R. Dussa HUF.

All restrained entities have been allowed three months to square off open derivative positions, but are prohibited from selling any assets or securities, except to pay the imposed penalties.

SEBI’s Message: Market Fairness Above All

The order concluded with a strong reminder:

“Unequal access to information induces inequitable results and erodes market fairness.”

SEBI reiterated its commitment to upholding transparency and integrity in securities markets, emphasizing that front-running and misuse of privileged information will attract strict enforcement action.

Final thoughts

This case underscores SEBI’s continued vigilance against insider trading and front-running practices. It also serves as a cautionary tale for traders and intermediaries that even indirect participation through relatives’ or HUF accounts can attract severe penalties if it results in unfair gains from non-public information.