SEBI unearths front-running scam, bans Ketan Parekh, Rohit Salgaocar, impounds ₹66 crore

The Securities & Exchange Board of India (SEBI) has unearthed a front-running scam in the Indian securities market and in an interim order, debarred 22 entities, including Singapore-based stock broker Rohit Salgaocar and stock broker Ketan Parekh for alleged involvement.

The market regulator has also issued orders to impound wrongful gains of about ₹66 crore from the accused.

Front-running refers to an illegal practice in the stock market, where an entity trades on the basis of advance information from an broker or analyst before the information has been made available to their clients.

Mr. Salgaocar and Mr. Parekh devised the entire scheme to unjustly enrich from the NPI (non public information) pertaining to the ‘big client’ by orchestrating front-running activities,” the SEBI order said.

“An amount of ₹65,77,11,547, being the total unlawful gain earned from the alleged violations, shall be impounded,” the order added.

Mr. Parekh was earlier imprisoned and debarred from stock markets for 14 years for his role in the infamous stock market scam of 2000.

He and Mr. Salgaocar orchestrated a method of front-running the trades of a U.S.-based fund house referred to as (“big client” or “FPI” in the order) which manages about $2.5 trillion globally.

For executing the scheme, Mr. Parekh has used his earlier network of Kolkata-based entities, as per the order.

Mr. Salgaocar, had access to the information regarding the forthcoming trades of the FPI which he used to pass on to Mr Parekh.

On the basis of this information, Mr. Parekh built positions through various Kolkata-based entities.

Then these entities would square off their positions by matching the same with the orders of the U.S.-based fund. This was going for a period of almost 2.5 years, SEBI said.

This scam came into light while SEBI was developing a new alert model for identifying information-based trades.

The SEBI, in its 189-page, order details the modus-operandi, the flow of information, Bloomberg and WhatsApp chats and how money was transferred using angadiyas.

What is interesting is that Mr. Salgaocar and Mr. Parekh, orchestrated the scheme by staying outside the regulatory ambit, running the entire show through associates.

Mr. Parekh used WhatsApp to communicate and frequently changed his mobile number procured in the name of fake entities.

Mr. Salgaocar, who commands a big clout in the Indian trading community, had access to the trade-related information of the fund house. He was neither its employee nor had any trading contract with them.

Instead of the employees of the fund house, it was Mr. Salgaocar who placed orders.

This was how he placed trades of the fund house and matched the same with those of Mr. Parekh’s associates.

He had entered into agreement with a few Indian trading members, through which he had received kickbacks amounting ₹27 crore, as per the order.

The scam was unearthed by SEBI through search and seizure operation at around 20 locations, spanning Kolkata and Mumbai. During investigation, all the entities confessed to their roles in the scam, it is learnt.