Another SAT Order on Front Running

Last month, Mr. Jayant Thakur had discussed
an order of the Securities Appellate Tribunal (SAT) in the case of Dipak Patel
where SAT interpreted the SEBI (Prohibition of Fraudulent and Unfair Trade
Practices Relating to Securities Markets) Regulations, 2003 (the “PFUTP
Regulations”) to mean that front running is not a crime unless it is committed
by an “intermediary”. Mr. Thakur’s post points to the difficulties in
interpreting the PFUTP Regulations. There has been a significant discussion of
this decision, and examples include Yash
Bansal & Sandeep Parekh
, Professor
J.R. Varma
and Mobis
Philipose
.
Earlier this week, the SAT has followed an identical approach
in another
case
pertaining to Sujit Karkera, Shilpa Kotak and Purushottam Karkera. The
facts are that parties traded in 3 scrips through B P Equities Pvt Ltd in
advance of trades by Citigroup Global Markets in those scrips. Evidence
suggests that the parties had prior knowledge of the Citigroup trades that was
obtained from a trader of Citigroup, Suresh Menon. The facts clearly suggest a
case of front running, and SAT is unequivocal regarding the factual
circumstances:
5.
… The facts on record establish that there was constant flow of information to
the appellants from Mr. Suresh Menon and the telephonic conversation related
specifically to the order, place, time and quantity of the scrips transacted.
On a consideration of the facts on record and the material relied on by the adjudicating
officer we have no hesitation in holding that the alleged transactions of the appellant
are in the nature of “front running”.
However,
SAT was hamstrung by the technicalities of its previous decision in Dipak Patel, and quashed SEBI’s
imposition of fine because the parties involved were not “intermediaries” under
the PFUTP Regulations. SAT simply
followed its own precedent.

Despite the critique of
this approach, it appears that SAT would be constrained from making any
departures considering that this technicality is well entrenched in its
reasoning given these precedents. Hence, any departure to a wider interpretation
could only come by way of an appeal by SEBI to the Supreme Court, or
alternatively an amendment by SEBI to the
PFUTP
Regulations to clarify the position.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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