The Securities and Exchange Board of India (Sebi) on March 19, 2024 confirmed the involvement of five entities in a front-running case associated with Life Insurance Corporation (LIC), the country's largest insurer.
Yogesh Garg, formerly working in LIC’s investment department is the prime accused in this case along with his mother, mother-in-law and two others. Front-running trades were executed through these family members’ dematerialised accounts, Sebi said.
What Happened?
Sebi initiated investigations in response to surveillance alerts regarding possible front-running by certain people from January-March 2022. Sebi examined these dubious trades and concluded that these people had engaged in front trading, after which it passed interim orders against them on April 27, 2023.
In its interim order, Sebi deemed that these entities were jointly liable for the proceeds generated from the front-running trades, amounting to Rs. 2.44 crore. But despite directions to deposit the wrongful gains, they failed to comply with Sebi’s order.
Sebi then again asked them to deposit the proceeds in the escrow account immediately.
“In view of the reasons discussed in the preceding paragraphs, I find that the submissions of the notices are insufficient to refute the prima facie conclusions drawn in the Interim Order,” Sebi said on March 19, 2023, confirming the prima facie findings in its interim order.
LIC responded to the order and asserted that it had put in place robust controlling mechanisms to prevent front-running, adding that the implicated employee had been dismissed.
“All stringent measures for transactional hygiene of the dealing room are put in place, i.e., entry by biometric, CCTV coverage, restriction on electronic gadgets, etc.,” LIC said in its response to Sebi’s order.
What is Front-Running?
Front-running is an illegal practice in the stock market where a person trades based on prior insider information from a broker or directly, about a set of trades going to get executed.
Sebi said that in the LIC-related front running case, a Buy-Buy-Sell (BBS) and Sell-Sell-Buy (SSB) pattern was noticed.
In the Buy-Buy-Sell (BBS) trading pattern, the alleged front-runner uses non-public information about an upcoming buy order from a big entity. Here it was LIC. The front-runner swiftly place his own buy order before the big entity’s order is executed. Once the large buy order from big entity is processed, the demand for the scrip increases, causing its price to rise. At this point, the alleged front-runner sells the securities he bought earlier at the higher price, thus profiting from the price difference. Similarly, in the Sell-Sell-Buy (SSB) pattern, the alleged from runner obtains non-public information regarding an impending sell order of a big entity. He or she then proceeds to place sell orders before the big sell order is executed. When the big entity’s sell order goes through, a decrease in the price of the share typically ensues. Then the alleged front-runner repurchases the securities previously sold at a lower price and profits from the price difference.
