Sebi Takes Action Against Ketan Parekh and Two Others for Front-Running Scheme Generating Illegal Gains

The Securities and Exchange Board of India (Sebi) has taken action against three individuals, including Ketan Parekh, for their alleged involvement in a front-running scheme. This scheme reportedly generated illegal profits amounting to Rs 65.77 crore. Sebi has barred these individuals from participating in the securities markets immediately and directed them to impound the unlawful gains.

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Front-running is an illegal stock market practice where trades are made based on advance information from brokers or analysts before it is shared with clients. Sebi has issued show cause notices to 22 entities, including Parekh, Rohit Salgaocar, and Ashok Kumar Poddar, asking why penalties should not be imposed. These entities must respond within 21 days of receiving the order.

Illegal Gains and Market Manipulation

Sebi's interim order, spanning 188 pages, revealed that Rohit Salgaocar and Ketan Parekh orchestrated the scheme to profit from non-public information related to a major client. Ashok Kumar Poddar admitted to facilitating these activities. The regulator noted that prior to executing suspicious trades, instructions were communicated via WhatsApp or calls from contacts saved as Jack/Jack New/Jack Latest New/Boss.

Upon investigation, these contact numbers were linked to Ketan Parekh, who received non-public information from Rohit Salgaocar. Following specific instructions from Parekh, trades were executed by front runners, resulting in unjust profits. Evidence suggests that traders of the big client discussed trades with Salgaocar before execution, which he shared with Parekh for illegal gains.

Past Offences and Current Proceedings

Ketan Parekh has a history of market manipulation. He was previously involved in manipulative trades through his broking firms and investment companies, contributing to the 2001 stock market crash. Consequently, he was barred from securities markets for 14 years. The current proceedings stem from an investigation covering January 1, 2021, to June 20, 2023.

Sebi's whole-time member Kamlesh C Varshney stated that the evidence highlights a complex scheme at play. Salgaocar used information from traders of the big client to ensure counter parties for trading while routing this information to Parekh for illegal profits. Varshney emphasised the need for an interim order to impound unlawful gains.

Regulatory Actions and Future Implications

The Big Client involved is a US-based fund house with various funds registered as Foreign Portfolio Investors with Sebi. Considering past offences by Parekh and Poddar in dealing with securities markets, they have been prohibited again from such activities. The order restrains Salgaoncar, Parekh, and Poddar from buying or selling securities or associating with any intermediary registered with Sebi.

Sebi's actions highlight its commitment to maintaining market integrity by addressing fraudulent practices. By barring individuals involved in front-running schemes and impounding illegal gains, Sebi aims to deter future violations and uphold fair trading practices in the securities market.