The incidence of front running by a fund manager and a trader at a mutual fund hasn't come as a complete surprise to Securities and Exchange Board of India (SEBI), as per sources close to the market regulator.
According to these sources, the regulator has been utilising its database to identify front running based on coordinated price movements in equities purchased by funds, on the day of purchase.
The regulator had been alerted to such bad apples by market participants on various occasions. The big problem was to first spot the front running and then prove it.
For the past few months, SEBI has been using artificial intelligence on its data trove to identify such synchronised stock moves on the days of purchase of stocks by funds.
Over time the regulator has honed its algorithms and is now satisfied that front running does happen in quite a few instances sometimes by mutual fund employees and sometimes by employees at the brokerages.
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Can the regulator conclusively say there is collusion and front running purely on the basis of patterns of buying?
Proving collusion is rendered difficult by the fact that the employees concerned use mules or rented accounts to do the trades. In these days of whatsapp messages and calls, it will be tough to establish such any mail or phone trail.
Legal eagles say, to be able to prove collusion and front running, SEBI needs to be classified as an enforcement agency under the IT Act, which in turn will give it the right to seize phone and whatsapp records.
Sources close to SEBI say that the regulator may even broach the government to give it these powers once it is satisfied with its own algorithms and artificial intelligence software.
Lawyers point out that in the recent Rakhi Trading vs SEBI case and in a few previous cases like SEBI v. Kishore R Ajmera, the apex court held that in the absence of a direct evidence in synchronised transactions, "preponderance of probabilities" shall be the standard of proof with regard to civil liability.
Sources close to SEBI say, given this supportive interpretation by the apex court, the regulator can move against front-runners in mutual funds and brokerages even now.
In short, the case of a couple of employees dismissed by Axis AMC for front running may the first of many such cases that the regulator may unearth in the coming days. Watch this space.
First Published: May 20, 2022 10:40 AM IST
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