Front running by non-intermediary is prohibited practice as per SEBI Act: SC
Published: Sep 21, 2017
By TIOLCORP News Service
NEW DELHI, SEPT 21, 2017: IN a major decision the Apex Court has held that ‘front running by non-intermediary’ being fraudulent or unfair trade practice is a prohibited practice under Securities And Exchange Board of India (Prohibition of Fraudulent And Unfair Trade Practices Relating to Securities Market) Regulations, 2003. There were many appeals filed before the Court, all involving the issue of legality of ‘non-intermediary front running’ in security market.
The Court held that appeals filed by SEBI against the orders passed by the Appellate Tribunal be allowed by setting aside the Tribunal orders and the findings recorded and the penalty imposed by the Adjudicating Officer were restored. Appeals filed by the individual parties involved were dismissed.
The SC has noted that non-intermediary front running may be brought under the prohibition prescribed under regulations 3 and 4 (1), for being fraudulent or unfair trade practice, provided that the ingredients under those heads are satisfied. It was clear that in order to establish charges against tippee, under regulations 3 (a), (b), (c) and (d) and 4 (1) of FUTP 2003, one needs to prove that a person who had provided the tip was under a duty to keep the non-public information under confidence. Further such breach of duty was known to the tippee and he still trades thereby defrauding the person, whose orders were front-runned, by inducing him to deal at the price he did. It was noted that concerned parties to the transaction were involved in an apparent fraudulent practice violating market integrity. The parting of information with regard to an imminent bulk purchase and the subsequent transaction thereto are so intrinsically connected that no other conclusion but one of joint liability of both the initiator of the fraudulent practice and the other party who had knowingly aided in the same is possible.
