Raids were conducted by SEBI at multiple locations in Mumbai and Kolkata between 15 June and 18 June.
Mumbai
As a consequence of the PMO’s instruction to ensure clean and efficient stock exchanges in India, SEBI initiated probes on several brokerages that were suspected of insider trading or manipulation that resulted in losses to retail investors.
Recently, massive raids were conducted on the basis of source information on multiple brokers. Yet after conducting massive raids on stock market operators in Mumbai and Kolkata, SEBI has lately been going slow on the probe. The raids were conducted by SEBI on multiple locations in the two cities between 15 June and 18 June after its internal surveillance system started throwing up data on the pattern of some entities front-running the trades of US-based foreign portfolio investors (FPI) since 2022 up to recently. But the follow-up action and the investigations of the trail are in danger of going cold as a result of inadequate follow-up. Such a situation may defeat the very purpose for which SEBI was set up, not to mention the Prime Minister’s order to clean up any dubious trades so that investors are protected.
Usually, SEBI passes “Ex-Parte orders” before or after the raids without any delay, if the information gathered is of grave nature against entities involved in the racket. A court-like hearing for the parties is held at a later date. This was observed in SEBI’s recent action against YouTube influencers, where the regulator first issued an Ex-Parte order and then raided the suspects. In the current case, the fact that the information gathered was serious enough, can be gauged from SEBI’s decision to raid the entities. Hence, its delay in passing Ex-Parte orders has been noted by those watching to see if SEBI is serious or simply making a show for public opinion and then going silent. SEBI itself is firm that it is serious, and that the trades mentioned above will be fully and factually investigated so that the actual perpetrators are brought to book.
Ex-Parte orders are SEBI’s emergency powers that empowers the regulator to issue “cease and desist” directions against entities that are an imminent threat to the integrity of the stock markets. SEBI is also required to immediately put such orders in the public domain, mainly to alert retail investors about the racket. But officials in SEBI are now talking in hushed tones about last week’s raids. Ex-Parte orders need not be long and even a few lines will suffice based on the prima facie evidence available to SEBI due to its high-tech internal surveillance alerts. But no such urgency is seen in SEBI’s actions even after a week since the regulator launched the massive combing operation. Informants suggest that further questioning of other connected entities too has slowed down. Is front-running not a grave and imminent threat to markets, ask market watchers. Meanwhile, SEBI sources say that the agency is fully geared up to fulfil the order of the PMO to ensure that stock exchanges in India are clean and transparent. About the suspect trades, they say that some prominent brokers have been identified as the possible perpetrators, and that information necessary for action is being collated against them.
A team of around 75 SEBI officials was involved in the entire operation that started last week and a total of six persons, including a high net worth individual (HNI), who runs a family office from Mumbai’s plush business district of Nariman Point, have been interrogated for hours by the regulator. This was after SEBI’s search and seizure operations unearthed massive volumes of phone chat records that gave details of the fund transfers through hawala agents (money mules) between various entities linked to the operator. Chats also detailed profit sharing ratios between the entities and operators. SEBI has also seized laptops, documents etc during these raids.
Has SEBI developed cold feet? The regulator is yet to question the employees of the FPIs and Mumbai-based broking firms, from where the leaks happened, and also one of most infamous operators, who was earlier probed by the Joint Parliamentary Committee, though their names and that of the connected entities have cropped up repeatedly during the probe and the data seized.
THE PATTERN
Informants say that the entities in Mumbai and Kolkata, controlled by a large operator based out of Mumbai, had advanced information of the FPI orders that were to hit the markets. Alerts on these connected entities were provided by SEBI’s integrated market surveillance system, which has proven to be the most effective on tracking front running and insider trading for the last few years now. FPI decisions to buy or sell shares in bulk are well-deliberated and follow a long internal process before the actual execution of trades. In many instances, such a process could take days or hours before the execution. SEBI’s surveillance system found that somehow a common set of entities would buy and sell shares in sync ahead of the particular FPI orders that hit the market. After SEBI did a detailed profiling of the entities, the raids were conducted, data and electronic evidence seized and people connected were questioned. Thereafter, the trail now runs cold… there is a lull after the storm.