Busting a major 'front running' case in the stock market, Sebi on Friday ordered impounding of unlawful gains worth nearly Rs 15 crore (Rs 150 million) from brokerage firm Sharekhan and 15 other entities.
The order comes a day after French giant BNP Paribas announced acquisition of home-grown brokerage firm Sharekhan in an estimated Rs 2,000-crore (Rs 20 billion) deal.
Front running refers to an illegal practice in stock market where an entity trades on the basis of advance information from a broker or analyst before the information has been made available to their clients.
In an order passed late in the night, Sebi directed impounding of illegal gains of Rs 50.93 lakh from Sharekhan, while an amount totalling over Rs 14 crore (Rs 140 million) would be impounded from 15 other entities, including individuals and companies.
The case refers to 'front running' in at least 29 shares including Idea Celluar, Suzlon Energy, Jet Airways, DLF, Cairn India, ICICI Bank, RCOM, Indian Hotels, HDFC Ltd, L&T, Unitech, Yes Bank, Videocon, JSW Steel and Hindalco.
The order follows a Sebi probe into suspected front-running by certain entities between March 2009 to March 2011.
The investigation revealed that the trades in the accounts of at least seven entities, collectively referred to as "front-runners" or 'clients of Sharekhan', were in the nature of front-running the orders and trades of the "Sterling Group" and that the subsequent orders placed by the front-runners matched almost completely with the orders placed by the Sterling Group.
These entities carried out their front-running activity predominantly through the stock broker, Sharekhan Limited, and their accounts at Sharekhan were handled by one Madhu Chanda, a branch and relationship manager.
The probe also revealed that the trades of Sharekhan and Madhu Chanda's husband Anandilal Chanda, among others, were ahead of trades of the seven clients of Sharekhan.
In a 42-page order, Sebi further said that one Manish Chaturvedi, an employee in the Sterling Group, was generally placing orders with the stock brokers on behalf of the Group. He was found to have knowledge of investments and the impending buy or sell orders of the Group.
In its probe, Sebi also retrieved voice recordings from HSBC InvestDirect Securities India Limited and JM Financial Services Limited, pertaining to placement of certain orders in the accounts of the Sterling Group. Mobile call data records of the involved persons were also accessed during the probe.
Sebi said that due to the trading based on prior information of trades of Sterling Group, the front-runners have caused loss to other investors by benefitting unlawfully.
"As the alleged gains were made during the period March 2009 - March 2011, it becomes reasonable and necessary to levy an interest at 12 per cent simple interest per annum from the date on which such profits were earned," the order noted.
Since it is a stock broker, Sharekhan may have numerous obligations towards the clearing corporations for trades on a daily basis. Hence, immediate freezing of the bank and demat accounts may result in hardship for the investors in the market.
"Therefore, its bank and demat accounts are not ordered to be frozen for debits immediately, subject to it depositing the amount to be impounded ie Rs 50,93,894," the order said.
The amount is to be deposited in an escrow account within seven days. In case, Sharekhan fails to comply with the condition, Sebi said then its bank and demat accounts should be frozen for debits and also be restrained from disposing off any assets till the escrow account is funded with the requisite amount.
In his order, Sebi Whole Time Member Prashant Saran said there is a possibility that persons/entities involved may divert the unlawful gains.
"Therefore, in order to prevent such persons/entities from diverting the funds and to safeguard the interests of securities market, it becomes necessary for Sebi to take urgent preventive steps of impounding and retaining the proceeds by way of an interim measure," he said.
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