Mint Explainer: Featured cases and Sebi’s fight against market manipulation

Cases involving prominent fund houses like Axis Mutual Fund and Quant Mutual Fund have hit the headlines recently for their links with these cases. The regulator, which uses cutting-edge technology and has expanded surveillance, tripled its investigations to 83 in the last fiscal year compared to FY23. Mint explains Sebi’s increasing efforts to clamp down on front-running and how it affects retail investors and the way forward.

What is getting ahead? How does it affect retail investors?

Front-running, also known as tailgating, is a form of market manipulation. It is the trading of a stock or financial instrument by a broker, trader or employee who has inside information about a future transaction that would affect its price. The intermediary works based on information that is not public and would affect the price of securities in the market.

It represents a serious risk for retail investors, particularly those without access to inside information. When leaders use sensitive data for their benefit, they can artificially drive up prices, leaving everyday investors buying stocks or securities at inflated rates. This creates an uneven playing field, often causing individual investors to overpay for their investments.

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Furthermore, getting ahead of ourselves undermines confidence in financial markets. If retail investors believe the system is unfair or rigged by those with privileged access, they may be discouraged from participating. This reluctance not only limits your investment opportunities but also stifles broader market growth.

What are the most notable cases according to the Sebi scanner?

The Axis Mutual vanguard case gained a lot of prominence after Sebi, in 2023, banned Viresh Joshi, the fund manager of Axis Mutual Fund, and 20 entities involved with him in a vanguard case linked to the fund house. The regulator has identified $30.55 crore as ill-gotten gains obtained through the vanguard activities and ordered this amount to be confiscated.

In June, Quant Mutual Fund came under the lens of Sebi, with the regulator investigating early investment charges in the financial firm, which has grown exponentially in the last five years.

There are at least ten cases pending before the SAT arising from Sebi orders passed in FY24. These include cases against Rohit Mankotia, Banhem Stock Broking, V Marc India, NNM Securities Ltd, CHL Stocks Concepts, Mauria Udyog, Sasidhar V, Quest Investment Advisors and those involving companies like Wockhardt and Bank of India AXA MF.

What are the current Sebi amendments on MF priority matters?

At Sebi’s board meeting in April, the market regulator approved amendments to its mutual fund regulations, a move it said is aimed at establishing an institutional mechanism to identify and discourage fraudulent and advance transactions. In May last year, the regulator submitted a consultation paper in this regard. This came after the regulator noted a significant increase in the number of cases brought forward, which could potentially lead to abuse of the markets.

Pertinently, regarding the requirement to record all communications of traders and fund managers, in April the board had exempted the recording of face-to-face communications, including out-of-office interactions, during market hours. This will become effective after the implementation of the institutional mechanism by the AMCs, as mentioned above.

Also read: Sebi targets asset management firms in crackdown on market abuse

The regulator asked industry body Association of Mutual Funds of India (Amfi) to specify detailed standards for such institutional mechanisms. The mechanism will consist of enhanced surveillance systems, internal control procedures and escalation processes to identify, monitor and address specific types of misconduct, including anticipatory trading, insider trading and misuse of sensitive information.

What is the number of regulatory actions on initial and related violations?

Sebi has stepped up its fight against market malpractices, introducing stricter surveillance systems and improving cooperation with stock exchanges to detect irregular trading patterns. According to the FY24 annual report, Sebi initiated 24 overtaking investigations in FY23 and 83 cases in FY24.

In FY24, Sebi carried out search and seizure operations involving 106 entities at 83 locations spanning seven cities across the country. Based on alerts generated by the internal monitoring system, investor complaints and data provided by inspection reports of stock exchanges, Sebi uncovered evidence of fraudulent activities, which are actionable under the Prohibition of Trade Practices Regulations. Fraudulent and Unfair Trade Practices of 2003. The majority of the appeals decided by the Securities Appellate Tribunal (SAT), which is 58.9%, arose from violations of the Prohibition of Fraudulent and Unfair Trade Practices or PFUTP rules.

What legal experts say

Ragini Singh, founder of Ragini Singh and Associates, believes that high-speed algorithms equip traders with the technology to exploit non-public information profitably, sometimes seconds before that information is available in the public domain. This, coupled with increased regulatory oversight, appears to be resulting in an increase in advanced cases. This is expected to increase the number of cases filed before the SAT once Sebi issues prohibitory orders.

Singh also said that due to the complicated structuring of trades, it is not always easy to detect early trades. However, greater oversight by Sebi must be the way forward.

Vaibhav Kakkar, senior partner at Saraf and Partners, said: “There is still some regulatory ambiguity regarding what constitutes a ‘substantial transaction’ in the context of an initial case and leaders continue to develop and adopt unique trading patterns. However, Sebi has taken several measures to address cutting-edge practices, including prohibiting blatant entities/individuals from accessing the securities market.”

The regulator’s commitment to combating early foreclosure is also evident in the recent circular issued by it on establishing enhanced surveillance systems, internal control procedures and escalation processes by asset management companies to identify and deter early execution activities in the Indian market, he said. .