SEBI penalises front-running again, does not follow SAT’s order

There
is yet another Order of SEBI on front running and SEBI holds that transactions
in the nature of front running are violative of the PFUTP Regulations. This is
close after SAT’s recent ruling (“the Patel Order”) holding that front running cannot
be punished, as discussed by me here, and another later ruling by SAT (“the
Karkera Order”) as discussed by Mr. V. Umakanth here. By an Order dated 19th
December 2012, the Adjudicating Officer levied penalty of Rs. 25 lakhs on the
persons who allegedly made profit of Rs. 7.16 lakhs from transactions that fit
the description of what are popularly known as front running transactions.
The
facts of the present case, being substantially similar as in earlier cases,
need not concern us here to avoid repetition. What is interesting is that,
despite the parties drawing attention to the ruling of SAT holding that front
running does not amount to violations of the PFUTP Regulations, SEBI has held
that it is still punishable under the said Regulations.
It
may be remembered that SAT quite clearly held that transactions in nature of front
running are punishable under the PFUTP Regulations only if committed by an
intermediary and not by others. More specifically, it held that, in absence of
any specific provision of law in securities laws, such transactions by
non-intermediaries are not punishable at all. To quote the Hon’ble SAT from the Patel Order:-
In the absence of any
specific provision in the Act, rules or regulations prohibiting front running
by a person other than an intermediary, we are of the view that the appellants
cannot be held guilty of the charges levelled against them.”.
This ruling was
followed explicitly in the later SAT ruling in the Karkera Order.
The parties accused in
this case did cite the Patel Order before SEBI. However, interestingly, SEBI
did not accept this ruling to give relief to the accused on the following
ground:-
The Noticees have even produced the
judgment of the Hon’ble Securities Appellate Tribunal in Dipak Patel Vs. The
Adjudicating Officer (SAT Appeal No. 216 of 2012 decided on 09/11/2012)
in
which Regulation 4(2)(q) of PFUTP Regulations, 2003 has been interpreted by the
Tribunal. However, the present case does not deal with the violation of the
said Regulation but Regulation 3 (a), (b), (c) & (d) and 4(1) of PFUTP
Regulations, 2003. The CBI deals in shares on its own account and on behalf of
its customers. CBI is a publically listed company and any loss incurred on its
investments adversely would affect the interests of its own shareholders and
customers. Therefore, the fraudulent and manipulative activities of the
Noticees fall upon the CBI and its customers and ultimately on the investors of
the securities market. In other words, the undue profits earned by the Noticees
are nothing but the losses to them.”
Though not specifically
made clear, it does appear that Central Bank of India (the employer of one of
the noticees) is not an intermediary. If this is the case, then the SAT
rulings would directly apply. The statement of SEBI that “the present case does
not deal with the violation of the said Regulation” (i.e., 4(2)(q)) is not
valid, in context of the SAT rulings as a whole, particularly the words
reproduced earlier.
Moreover, the Patel Order
did cite and discuss the provisions of Regulation 3(1) (a) to (d) of the PFUTP
Regulations.
The point of SEBI that
CBI is a publically listed company and so loss incurred by it would be borne by
its shareholders may sound valid but this may imply that if there were no such
public shareholders, front running would not be a violation. Same concern can
be raised for the point that such transactions affect the interests of its
customers. Also, to reiterate, this still does not deal with SAT’s ruling that
in absence of specific provisions for non-intermediaries, front running cannot
be punished.
An opportunity was thus
lost to discuss and analyse the provisions individually and in detail relating
to fraud and unfair trade practice in the PFUTP Regulations and apply the same to
such cases. Instead, as in earlier case, several provisions were merely cited together
and the noticees held to have violated them.
This decision also
raises again a long standing concern about the non-binding nature in law of SAT
decisions as precedents on SEBI. This concern particularly arises because the
next appeal after SAT is straight to the Supreme Court.
The ruling of SAT in
the Patel Order (and, so, the Karkera Order too) is of course dissatisfactory,
and the concerns it raises have already discussed earlier here. One hopes that
this issue is resolved soon by appeal to the Supreme Court and/or amendment to
the law. For such Orders as the present one are satisfactory neither as
practice, nor as precedents for other cases in other contexts.

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CA Jayant Thakur

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