[This post is contributed
by Anjali R. Menon, who is a Senior Associate
at a leading law firm in Mumbai. She also runs a blog at http://atlawggerheads.wordpress.com/.
She can be reached at anjali.r.m@gmail.com.
by Anjali R. Menon, who is a Senior Associate
at a leading law firm in Mumbai. She also runs a blog at http://atlawggerheads.wordpress.com/.
She can be reached at anjali.r.m@gmail.com.
It relates to the
issue of front running, which has been previously discussed on this Blog in the
context of cases decided by the Securities Appellate Tribunal (SAT) and the
Securities and Exchange Board of India (SEBI). In this post, Anjali discusses
some new proposals by SEBI intended to plug some loopholes that exist under the
current legal regime]
issue of front running, which has been previously discussed on this Blog in the
context of cases decided by the Securities Appellate Tribunal (SAT) and the
Securities and Exchange Board of India (SEBI). In this post, Anjali discusses
some new proposals by SEBI intended to plug some loopholes that exist under the
current legal regime]
On 12 August 2013, the
Securities and Exchange Board of India (SEBI)
at its Board meeting decided to put an end to front running once and for all.
Through its press
release, SEBI announced that the SEBI (Prohibition of Fraudulent and Unfair
Trade Practices relating to Securities Market) Regulations, 2003 (FUTP Regulations) will soon be amended
to ensure the following:
Securities and Exchange Board of India (SEBI)
at its Board meeting decided to put an end to front running once and for all.
Through its press
release, SEBI announced that the SEBI (Prohibition of Fraudulent and Unfair
Trade Practices relating to Securities Market) Regulations, 2003 (FUTP Regulations) will soon be amended
to ensure the following:
(i) the current provisions prohibiting front running
will not be regarded as exhaustive; and
(ii) illegal mobilisation of funds without SEBI registration
as a collective investment scheme (CIS)
would be regarded as a fraudulent and unfair trade practice.
So what does all this imply?
What is ‘front running‘ and why are these
proposed amendments required?
What is ‘front running‘ and why are these
proposed amendments required?
‘Front running‘ has not been defined in any Indian statute. Although
the term sounds like a proactive, diligent act, it is not at all laudatory. The
easiest way of explaining ‘front running‘
may be by drawing a parallel with insider trading. Why is the latter
prohibited? Because an insider has access to unpublished price sensitive
information which could be misused to manipulate the market and reap profits.
Front running is like insider trading by an outsider. Who are these outsiders?
Now that’s the question!
the term sounds like a proactive, diligent act, it is not at all laudatory. The
easiest way of explaining ‘front running‘
may be by drawing a parallel with insider trading. Why is the latter
prohibited? Because an insider has access to unpublished price sensitive
information which could be misused to manipulate the market and reap profits.
Front running is like insider trading by an outsider. Who are these outsiders?
Now that’s the question!
The FUTP Regulations as they
currently stand prohibit an ‘intermediary
from buying or selling securities in advance of a substantial client order‘
(Regulation 4(2)(q) of the FUTP Regulations). Stock brokers, merchant bankers, portfolio
managers, investment advisers, FIIs, asset management companies are some of the
intermediaries regulated by SEBI.
currently stand prohibit an ‘intermediary
from buying or selling securities in advance of a substantial client order‘
(Regulation 4(2)(q) of the FUTP Regulations). Stock brokers, merchant bankers, portfolio
managers, investment advisers, FIIs, asset management companies are some of the
intermediaries regulated by SEBI.
SEBI and the Securities
Appellate Tribunal (SAT) faced
several instances (here
and here)
of persons benefitting from the price movement of a company’s shares by trading
in shares of the company based on information of forthcoming orders of another
trader in the market. But the authorities could not book the individuals for ‘front running‘ as these individuals were
not intermediaries – even though some of these individuals traded on the shares
after the confidential information had been passed on to them by intermediaries,
and the number of shares traded by such persons were synchronized with and identical
to the subsequent price-influencing orders.
Appellate Tribunal (SAT) faced
several instances (here
and here)
of persons benefitting from the price movement of a company’s shares by trading
in shares of the company based on information of forthcoming orders of another
trader in the market. But the authorities could not book the individuals for ‘front running‘ as these individuals were
not intermediaries – even though some of these individuals traded on the shares
after the confidential information had been passed on to them by intermediaries,
and the number of shares traded by such persons were synchronized with and identical
to the subsequent price-influencing orders.
There are several other broad
provisions in regulation 3 of the FUTP Regulations which ban any person from buying, selling or
otherwise dealing in securities in a fraudulent manner, or from employing any
manipulative/deceptive device during purchase/sale of any listed security.
However, the hands of the authorities were tied because the specific regulation
prohibiting front running applied only to intermediaries. The authorities
observed that the front running prohibition did not always read this way – the
1995 regulations (which were replaced by the FUTP Regulations in 2003) barred any person and not merely intermediaries from front running.
provisions in regulation 3 of the FUTP Regulations which ban any person from buying, selling or
otherwise dealing in securities in a fraudulent manner, or from employing any
manipulative/deceptive device during purchase/sale of any listed security.
However, the hands of the authorities were tied because the specific regulation
prohibiting front running applied only to intermediaries. The authorities
observed that the front running prohibition did not always read this way – the
1995 regulations (which were replaced by the FUTP Regulations in 2003) barred any person and not merely intermediaries from front running.
This is why SEBI has
proposed amendments to the FUTP Regulations to ensure individuals and
unregistered CISs do not take advantage of this loophole and circumvent the law
by undertaking front running. SEBI intends to amend the FUTP Regulations to
clarify that the manipulative, fraudulent and unfair trade practices listed in
regulation 4 of the FUTP regulations will not be regarded as exhaustive and the
general provisions of regulation 3 will have an overriding effect. To put an
end to CISs operating without SEBI registration, SEBI has also passed the Securities
Laws (Amendment) Ordinance, 2013 (SEBI
Ordinance) and declared that any pooling of funds involving a minimum
corpus of INR 100 crores will be deemed to be a CIS. The SEBI Ordinance has
also intensified SEBI’s investigative and enforcement powers – i.e. SEBI can
now conduct search and seizure, call for records and information (including
telephone call data records), record statements on oath, obtain information
from overseas regulators, arrest and detain defaulter’s or attach his assets and
bank accounts. SEBI can also establish special courts for speedy disposal of
cases.
proposed amendments to the FUTP Regulations to ensure individuals and
unregistered CISs do not take advantage of this loophole and circumvent the law
by undertaking front running. SEBI intends to amend the FUTP Regulations to
clarify that the manipulative, fraudulent and unfair trade practices listed in
regulation 4 of the FUTP regulations will not be regarded as exhaustive and the
general provisions of regulation 3 will have an overriding effect. To put an
end to CISs operating without SEBI registration, SEBI has also passed the Securities
Laws (Amendment) Ordinance, 2013 (SEBI
Ordinance) and declared that any pooling of funds involving a minimum
corpus of INR 100 crores will be deemed to be a CIS. The SEBI Ordinance has
also intensified SEBI’s investigative and enforcement powers – i.e. SEBI can
now conduct search and seizure, call for records and information (including
telephone call data records), record statements on oath, obtain information
from overseas regulators, arrest and detain defaulter’s or attach his assets and
bank accounts. SEBI can also establish special courts for speedy disposal of
cases.
In one
particular case SEBI did not follow the trend set by SAT and sought to impose sanctions on non-intermediaries (an equity dealer of a listed company and his
wife) for indulging in front running. But this case will not serve as a
precedent for prohibiting non-intermediaries from front running because the
rationale for punishing the offenders in this case was very different. Relying
on regulation 3 of the FUTP Regulations, SEBI alleged that the ill-gotten profits
of the husband-wife duo were nothing but losses suffered by the public listed
company, its shareholders and customers and the investors in the securities
market.
particular case SEBI did not follow the trend set by SAT and sought to impose sanctions on non-intermediaries (an equity dealer of a listed company and his
wife) for indulging in front running. But this case will not serve as a
precedent for prohibiting non-intermediaries from front running because the
rationale for punishing the offenders in this case was very different. Relying
on regulation 3 of the FUTP Regulations, SEBI alleged that the ill-gotten profits
of the husband-wife duo were nothing but losses suffered by the public listed
company, its shareholders and customers and the investors in the securities
market.
All in all, the walls are
closing in on the front runners – their finishing line is near!
closing in on the front runners – their finishing line is near!
– Anjali R. Menon