SEBI Asks Parekh Father-son Duo To Disgorge Unlawful Gains of Rs22.88 Lakh Earned through Front-running

Moneylife Digital Team 13 February 2023

Investor Interest

While imposing a penalty of Rs15 lakh, the Securities and Exchange Board of India (SEBI) has asked Ketan Parekh and his father Bhupendra to disgorge, with an interest of 12% per annum Rs22.88 lakh, the unlawful gains earned by them from front-running trades via Quest Investment Advisors Pvt Ltd (Quest). The son is also barred from markets for two years, while the father, Bhupendra Parekh, is banned for three months.

In an order issued last week, Ananta Barua, whole-time member (WTM) of SEBI says, "I find that the noticees have made unlawful gains or averted loss of Rs22,88,126 from front running the orders of Quest, which are being directed to be disgorged by this order. I find that the show cause notice (SCN) does not allege any specific loss caused to investors or a group of investors as a result of the default by the noticees. I note that noticee no1 (Ketan Parekh) had placed all the front running orders in the account of noticee no2 (Bhupendra Parekh). I note that noticee no2 had authorised noticee no1 to place orders in his trading account."

In his reply to the SCN, Ketan Parekh contended that for calculating the amount of wrongful gains, only that quantity of his second leg orders which got matched with the large orders of Quest, should be taken into consideration and not the whole quantity of his trades in the second leg. On the basis of this contention, he has also submitted his own calculation of wrongful gains, along with his reply 29 June 2022.

In front running, a front-runner trades ahead (first leg) of the substantial buy or sell order as he has non-public information about the substantial buy or sell order and, thereafter, reverses his position (second leg) to reap the benefit due to movement in the price of the securities due to substantial buy or sell order.

This benefit of movement in price accrues to the front-runner due to the matching of his second leg orders, either with the substantial order or with other orders available in the system from other buyer or sellers, at a such moved price.

In both cases of matching, SEBI says, gains made by the front-runner are wrongful and are, thus, liable to be disgorged.

"Therefore, the contention of Ketan Parekh that for calculating the amount of wrongful gains, only that quantity of his second leg orders which got matched with the large orders of Quest, should be taken into consideration and not the whole quantity of his trades in the second leg, is untenable," the SEBI WTM says.

Ketan Parekh was a dealer of Quest, an entity registered as a portfolio manager under SEBI. The investigation of SEBI revealed that Ketan, who had the authority to place orders for the sale/buy of shares on behalf of Quest, committed front-running of trades through his father Bhupendra's account. Bhupendra Parekh had his trading account in Magnum Equity, a stockbroker.

SEBI observed that in 81 instances when a bulk buy order was about to come from Quest, buy trades were executed from the trading account of Bhupendra Parekh just before the buy order of Quest, and the sell order was placed just before or after Quest's order to square off his position to earn profits.

The market regulator imposed a fine of Rs10 lakh on Ketan Parekh and Rs5 lakh on Bhupendra Parekh.

(WTM/AB/IVD/ID5/23692/2022-23 Date: 10 February 2023)

Comments