Friday, December 21, 2012

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.

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