Analysis: Front running on the Trades of Axis Mutual Fund

On 28 February 2023, SEBI issued Interim Order cum Show cause notice to the Chief dealer of Axis Mutual Fund and his related parties to restrain them from dealing in the securities market by any means and deposit the wrongful gains of INR 30.55 crore in an Escrow account with a lien in favor of SEBI. The order was passed in the matter of front-running the trades of Axis Mutual Fund.

SEBI’s surveillance system alerted them on suspected trading activities conducted from 1 September 2021 to 31 March 2022 on the trades of Axis Mutual Fund that were in violation of provisions of the Securities and Exchange Board of India Act, 1992 (hereinafter referred to as “SEBI Act”) and other regulations. Based on alerts, SEBI conducted a detailed investigation to unearth the fraud and issued an interim order against the Chief dealer, Mr. Viresh Joshi, and his accomplice. Let us understand and analyze this case from a factual and legal point of view.

What is Front running?

Let us understand the legal definition of front running. As per SEBI’s circular (CIR/EFD/1/2012 dated May 25, 2012) front running means usage of non-public information to directly or indirectly, buy or sell securities or enter into options or futures contracts, in advance of a substantial order, on an impending transaction, in the same or related securities or futures or options contracts, in anticipation that when the information becomes public; the price of such securities or contracts may change.”

To classify an instance as front running, the following criteria are essential to be established:

1.????Access to non-public information

2.????Advance dealing in securities related to a substantial order

3.????Other facts such as motive/intent to earn a profit, gain undue advantage over other investors, non-disclosure, etc.

Let us analyze the facts of the case and ascertain whether the above-mentioned criteria are established.

Facts and findings of the case

1.????Access to non-public information: SEBI observed that the then Chief dealer of Axis Mutual Fund, Mr. Viresh Joshi had access to non-public price-sensitive information with regard to the trades to be executed for Axis Mutual Fund. Axis Mutual Fund has Assets Under Management of INR 2.52 lakh crore and the trades executed by such Mutual funds can have an impact on the supply, demand, and price of the traded securities.

SEBI established that Mr. Viresh Joshi did not disclose the possession of a mobile number not registered with the Mutual Fund while executing the trades. He passed on the proposed trading activities of Axis Mutual Funds to his accomplice based out of Dubai via WhatsApp conversations. (Criteria – Established)

2.????Advance dealing in securities related to a substantial order: SEBI observed that Mr. Viresh Joshi with his accomplice Mr. Sumit Desai and Mr. Prijesh Kurani loaned demat accounts of other individuals to conduct trading activities. Mr. Viresh Joshi regularly shared the proposed trading details of Axis Mutual Fund over WhatsApp with Mr. Prijesh Kurani, who would execute the trades moments prior to the trades of Axis Mutual Fund.

SEBI’s analysis revealed that the trading pattern of the said demat accounts and Axis Mutual Fund were similar for the days when Mr. Viresh Joshi shared the details of the trade with Mr. Prijesh Kurani for a considerable period of time. (Criteria – Established)

3.????Other facts: following details were observed to understand the motive of executing such trades.

a.????Motive/intent to earn profits: Mr. Viresh Joshi and his accomplice earned profits of INR 30.55 crore by executing such trades. The analysis of trading patterns revealed that on the days on which independent trades were executed by the said demat accounts, the profits were not substantial and even losses were accounted for on such trades. However, the trades closely followed by the trades of Axis Mutual Fund generated substantial profits.

b.????Non-disclosure: the non-disclosure by Mr. Viresh Joshi regarding possession of an unregistered mobile number in the trading room, and leakage of unpublished price-sensitive information through informal communication channels indicates the malicious intent of Mr. Viresh Joshi and his accomplice.

c.?????Usage of unaccounted funds: SEBI observed that the funds utilized to execute the trades were obtained from unknown sources. Further Mr. Viresh Joshi and his accomplice promised the individual holders of demat accounts to legitimize their unaccounted money through trading activities.

(Criteria – Established)

Let us now understand the modus operandi and why Front running is prohibited as per SEBI Act and regulations.

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Modus operandi

The parties in this case followed the Buy-buy-sell or Sell-sell-buy strategy to execute the trades. For example, Axis Mutual Fund proposed to sell 32.30 lakhs shares of Hindalco Industries Limited. Before placing the order, Mr. Viresh Joshi leaked this information to his accomplice who sold 3.97 lakhs shares of Hindalco Industries Limited at INR 419.72 to 422.28 a minute prior to the order of Axis Mutual Fund. Subsequently, the shares were sold by Axis Mutual Fund, which led to a decrease in the share price of Hindalco’s scrip to an average price of INR 417.78.

Further, Mr. Viresh Joshi’s accomplice squared off their position by buying similar shares at a lower price and registered profits on their trade.

Conclusion

SEBI in its interim order noted that front-running trades are prima facie fraudulent and have the potential to mislead investors. Mr. Viresh Joshi and his accomplice have violated the provisions of regulation 4 of the Prohibition of Fraudulent and Unfair Trade Practices Regulations which states that “no person shall effect, take part in, or enter into, either directly or indirectly, transactions in securities, with the intention of artificially raising or depressing the prices of securities and thereby inducing the sale or purchase of securities by any person”.

SEBI noted that the front-running trades executed by Mr. Viresh Joshi and his accomplice interfered with the supply and demand market forces and artificially influenced the price and volume of particular scrip, which distorted fair price discovery and have the potential to mislead the investors.

(Views are personal)