SEBI bans Ketan Parekh, 2 others in front-running case; here's all you need to know

SEBI. File Pic

Markets regulator Securities and Exchange Board of India (SEBI) on Thursday barred three individuals, including Ketan Parekh, from the securities markets with immediate effect for their alleged involvement in a front-running scheme which generated illegal gains of Rs 65.77 crore, reported news agency PTI.

Further, Sebi directed 22 entities, including Parekh, to impound unlawful gains worth Rs 65.77 crore earned from the alleged violations, jointly and severally.

The regulator also restrained Ketan Parekh, Rohit Salgaocar and Ashok Kumar Poddar from associating with any intermediary registered with Sebi, either directly or indirectly, with immediate effect, reported PTI.

The front-running case:

Sebi issued show cause notices to 22 entities, including Ketan Parekh, Salgaocar and Poddar as to why suitable directions, including direction to disgorgement, debarment and imposition of penalty will not be passed, reported PTI.

These entities have to file their replies to Sebi within 21 days from the date of receipt of this order, the regulator said.

In a 188-page interim order, Sebi said "Rohit Salgaocar and Ketan Parekh devised the entire scheme to unjustly enrich from the NPI (Non-Public Information) pertaining to the big client by orchestrating front-running activities", reported PTI.

The regulator noted that Ashok Kumar Poddar has admitted to be a facilitator in the front-running activities.

On modus operandi adopted by Ketan Parekh and others, Sebi observed that prior to the execution of suspicious trades, the Front Runners (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, reported PTI.

Upon analysis of these contact numbers, it was found that these numbers belonged to Ketan Parekh who was receiving NPI from one, Rohit Salgaocar. After receiving specific and timely instructions, directly or indirectly, from Ketan Parekh, the FRs used to execute orders and made unjust profits.

"I note the evidence of the present case speaks volume about the intricate design that was at play. Traders of the Big Client were discussing with Rohit Salgaocar prior to executing trades and such information was prima facie encashed by Salgaocar by sharing the same with Ketan Parekh. While the traders of the big client were discussing trades with Rohit Salgaocar for ensuring counter parties for their trading, Salgaocar was using that information to make illegal profits by routing information to Ketan Parekh," Sebi's whole time member Kamlesh C Varshney said in the order, reported PTI.

The information reached Parekh, he acted in a systematic manner and trades were executed in different accounts which cumulatively generated unlawful profits, Varshney said.

Further, Sebi noted that Ketan Parekh is a habitual offender and has been found guilty of market manipulation in the past as well. Through his (Parekh) group broking firms and investment companies, he was indulged in manipulative trades which led to the stock markets crash in 2001, reported PTI.

Subsequently, the regulator has debarred him from the securities markets for 14 years.

The present proceedings are emanating from an investigation conducted for the period of January 1, 2021 to June 20, 2023 by the Securities and Exchange Board of India (Sebi).

"I am compelled to invoke the provisions of the PFUTP (Prohibition for Fraudulent and Unfair Trade Practices) regulations, to hold that it is a fit case for passing interim order and to impound the proceeds of prima facie unlawful gains made by noticees," Varshney said in the order, reported PTI.

The markets watchdog highlighted that the Big Client is a US-based fund house which has various funds registered as Foreign Portfolio Investors with Sebi.

Accordingly, Ketan Parekh and Ashok Kumar Poddar had been prohibited from dealing in securities and debarred from associating with the securities market in the past as well.

Considering the same, Salgaoncar, Parekh and Poddar will be restrained from buying, selling or dealing in securities or associating with any intermediary registered with Sebi, either directly or indirectly, with immediate effect, the order said.

What is front-running scheme?

Front-running refers to an illegal practice in the stock market, where an entity trades on the basis of advance information from an broker or analyst before the information has been made available to their clients.

(With inputs from PTI)