Running ahead, running amok

INDUSTRY MUST COME UP WITH STRINGENT BEST PRACTICES IN INTERNAL SURVEILLANCE & SUPERVISION

- SANDEEP PAREKH

ANY WILL RECALL the morning of March 1, 2001 when the proverbial penny, long waiting in the shadows of the tech boom, finally dropped, triggering one of the most significant crashes in Indian stock market history. This canonical event, that went on to inform sweeping structural reforms, also exposed an insidious and extensive pump-and-dump scheme orchestrated by one Ketan Parekh, no relative of the author, a former broker, and several major players in India's financial ecosystem. Nearly 23 years later, history seems to be repeating itself with another fraud masterminded by Parekh, uncovered by the Securities and Exchange Board of India (Sebi) after a months-long investigation into trading records, mobile communications, IP address mappings, and statements from key individuals.

The findings, released by Sebi in an interim order on January 2 expose a fraudulent scheme orchestrated to exploit sensitive, non-public information for illicit gains. This time around, though equally fraudulent, the modus operandi is fundamentally different from the last. Sebi has identified several individuals, including Rohit Salgaocar, Parekh, and others, who are found to have colluded to front-run the trades of an overseas institutional client, or "big client", of two Indian stock brokers. For the uninitiated, front-running is a form of market abuse where individuals trade securities based on advance knowledge of large, market-moving transactions by other investors. It allows the perpetrators to profit from predictable price movements, often at the expense of the original investor's interests and to the prejudice of the public. The probe revealed the involvement of individuals who can be categorized into information carriers, front-runners, and facilitators who played key roles in enabling the malpractice.