SEBI Nails Front-running
Front-running has been widespread in the Indian (and overseas markets) but regulatory authorities in India have rarely been able to nail it conclusively. This is exactly what the Securities and Exchange Board of India (SEBI) seems to have done. Front-running is buying and selling securities with insider knowledge, ahead of large orders placed by institutional investors. In a precedent-setting investigation, SEBI has unearthed how Dipak Patel, portfolio manager of the US-based foreign institutional investor (FII), Passport Capital, along with Kanaiyalal Baldev Patel, Anandkumar Baldev Patel and Bhoomi Industries, ran a nice racket of generating easy profits by placing and executing orders before the orders of Passport India on the same securities and subsequently squaring off the positions. All of them have been debarred from participating in the securities market, as their dealings were tantamount to front-running. SEBI has asked Kanaiyalal Baldev Patel and Anandkumar Baldev Patel to deposit the illegal gains amounting to Rs1.12 crore with the National Stock Exchange (NSE) within 15 days.

The modus operandi was as follows. KB Patel knew when Dipak Patel of Passport India would place his orders and for how much and bought and sold the same shares, timed with Passport’s trades. Here is one example. On 26 March 2008, KB Patel placed buy orders at 10.04am for shares of Ansal Properties while Passport India put its buying orders at 11.06am. During the same time, the price moved up from Rs151.95 to Rs155. A minute after Passport bought, KB Patel offloaded his shares, making a profit of Rs1.87 lakh from this move. The same modus operandi was followed in the synchronised buying and selling of many other scrips.

During the trading hours, Dipak Patel received or made 40 calls to and from AB Patel and eight calls to and from KB Patel. On 33 instances, the calls with AB Patel were around the time that the synchronised trading was taking place. In five out of eight, the calls were at the time during which buying and selling orders were placed by either KB Patel or Passport India. Amazingly, on many occasions, the front-running and synchronised trades generated tiny profits like Rs6,546. In one case, Gujarat NRE Coke was bought at Rs23 and sold at Rs23.10 for a profit of Rs12,093 while Maharashtra Seamless was sold at Rs270 and bought at Rs268. Nevertheless, SEBI has documented ample evidence to prove that KB Patel was front-running the trades of Passport India. Here is one interesting piece of evidence. On 31 January 2008, KB Patel bought 63,518 shares of Financial Technologies (FT) and sold the same number of shares when Passport bought 70,897 shares. Dipak Patel and the dealers of Karvy Stock Broking Private Ltd were talking about this transaction which SEBI traced to the Bloomberg transcripts. Karvy dealers wondered where the supply of FT shares was coming from. Dipak Patel replied: “I know exactly where they are coming from.” SEBI’s conclusion: “From the above, it can be prima facie inferred that Dipak Patel had masterminded both sets of transactions in such a manner that KB Patel benefits from the trades placed before those of Passport India.”

Sharing the Loot
The sale proceeds from the transactions between KB Patel and Passport India were deposited in KB Patel’s Kotak Mahindra Bank (account no 08150140002879) and were subsequently transferred to various other accounts or connected entities of KB Patel. There is a link with Dipak Patel here as well. He was found to have remitted funds from his NRE account (08151040000062) with Kotak Mahindra Bank to KB Patel’s account with Kotak Mahindra Bank in Kadi, Gujarat. The amounts received by KB Patel from Dipak Patel were subsequently transferred to Bhoomi Industries and withdrawn. The mailing address provided to Kotak Mahindra Bank by Dipak Patel in Gujarat is the same as that of KB Patel. Interestingly, KB Patel was authorised by Dipak Patel to operate his account as a mandate-holder in the account opening form.

Bhoomi Industries is a partnership of KB Patel and AB Patel. Bhoomi has two accounts with Shree Kadi Sahakari Bank Ltd, Gujarat — a current account (2292) and a hypothecation account (closed in 2008). In the current account of Bhoomi, high cash transactions were seen including withdrawal of Rs41,90,000 on 20 February 2009 and Rs14,00,000 on 25 February 2009. The outflow of funds from Bhoomi Industries provides ample evidence of massive money laundering in these transactions, according to SEBI.

Front-running is among the most common market malpractices. But the regulator has never been able to thoroughly investigate and nail front-running as it has done in case of Passport. After the remarkable investigation in the Pyramid Saimira case, this is another feather in SEBI’s cap.

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