If you were an investor back in the late 1990s and early 2000s, you would remember Ketan Parekh very well for his involvement in price manipulation in certain chosen stocks. Eventually, he was convicted for market manipulation and barred from the securities market for 14 years.
Parekh was back in the news this week after the Securities and Exchange Board of India (SEBI) passed an order against the stock market operator and his associates alleging front-running trades of a US-based fund.
What is front-running in stocks?
To put it simply, someone who is accused of front-running is essentially trading shares of a company based on insider knowledge of future transactions or certain sensitive information. A trader, broker, or even an asset manager and company insider may access confidential information and then buy or sell a particular stock or multiple stocks for personal profit.
From time to time, the market watchdog cracked down on front-running and took action against such manipulators. For instance, in 2023, SEBI had barred Viresh Joshi, the former chief dealer of Axis Mutual Fund, and others, in a front-running case linked to the asset manager. In December 2024, it had barred from the market an equity dealer with an insurance company and his associates for front-running.
What is the latest front-running case involving Ketan Parekh and others?
The case involves Rohit Salgaocar, a person residing in Singapore, a director of a company called Strait Crossing Pte, Ketan Parekh, and several stock brokers and traders, among others.
SEBI conducted an investigation from January 1, 2021 to June 20, 2023. Subsequently, search and seizure operations were carried out over three days, starting June 22, 2023, at the premises of 17 entities.
According to SEBI's interim order, traders of a foreign portfolio investor, which it hasn't named and only refers to as a big client, used to consult Salgaocar prior to placing orders in Indian markets and thus he allegedly had access to non-public information (NPI) with respect to "substantial impending transaction" in various scrips.
Parekh allegedly obtained the NPI from Salgaocar and orchestrated the scheme to communicate trading instructions based on NPIs to other noticees.
Proprietary trading accounts of registered stock brokers were used for executing trades allegedly based on the NPI.
Suspected modus operandi of Ketan Parekh and others
According to SEBI, "Prior to the execution of suspicious trades, frontrunners (FRs) were receiving trade instructions through WhatsApp chats or calls from a person whose contact number(s) was saved in the devices as Jack/Jack New/Jack Latest New/Boss, etc. Upon analysis of these contact numbers, it was found that these numbers belonged to Ketan Parekh who was receiving NPI from Salgaocar. After receiving specific and timely instructions, directly or indirectly, from Parekh, the FRs used to execute orders and made unjust profits."
A detailed analysis of orders placed by the Big Client and FRs revealed the recurrent matching of the scrip, price, quantity and timing of trades between the Big Client and FRs, which would not have been possible unless FRs were in possession of NPI or NPI-based trading instructions relating to impending orders of the Big Client in various scrips, it further said.
Upon further investigation of the matter, it was observed that "the NPI relating to impending orders of the Big Client was being passed from Salgaocar to Parekh who in turn used to communicate trading instructions based on such NPI, directly or indirectly, to the six FRs for execution in order to gain undue profits," it alleged.
Interim order points to almost Rs 66 crore in unlawful profit
SEBI, in its interim order, has stated that Rs 65.77 crore in total unlawful gains earned from the alleged violations shall be impounded. The noticees will have to credit or deposit jointly or severally this amount in an interest-bearing savings account with a scheduled commercial bank, and the amount will not be released without permission from SEBI.
Salgaocar, Parekh and Ashok Kumar Poddar (facilitator) have been restrained from buying, selling or dealing in securities or associating with any SEBI-registered intermediary with immediate effect.
Depositories shall be directed that no debit shall be made without SEBI's permission in respect of the demat account held by the noticees. The Registrar and Transfer Agents will not permit any transfer or redemption of securities, including mutual fund units, held by noticees.
The noticees will have to provide a full inventory of their assets no later than 15 days of the order. The noticees have been given 21 days from the receipt of the order to file their replies.
