SEBI Finds Front-Running Of Unifi Capital PMS Trades via Kotak Securities Dealer, Orders ₹1.29 Cr Disgorgement

The Securities and Exchange Board of India (SEBI) has held that eight entities engaged in a front-running scheme by misusing non-public information about trades of portfolio management services firm Unifi Capital Private Limited, accessed through a dealer at Kotak Securities Limited.

It directed disgorgement of Rs. 1.29 crore and imposed penalties totalling Rs. 1.52 crore.

SEBI Whole Time Member Amarjeet Singh found that the noticees consistently placed trades ahead of Unifi's orders and squared off positions to profit from the price impact created by those trades.

The case arises from an interim order-cum-show cause notice issued in April 2024 in relation to trades executed between April 2021 and May 2022. Unifi executed trades through 12 empanelled brokers, including Kotak Securities, where Ashok Maheshwari was working as a dealer, placing orders on its behalf.

SEBI observed a pattern of trades by the noticees in the same scrips as Unifi, placed in close proximity to its orders, along with a significant increase in intra-day trading and profits during the investigation period.

Call detail records and electronic communications showed that Darshan Bakul Shah (Noticee 2) received trading instructions from Maheshwari and that profits were shared in cash.

The regulator found that the noticees executed trades ahead of Unifi's orders, reversed the first leg, and squared off positions to generate unlawful gains of about Rs.1.30 crore.

The interim order had restrained the noticees from accessing the securities market and directed impounding of the alleged gains while calling upon them to show cause. Some noticees challenged the interim order before the Securities Appellate Tribunal, which granted a stay on the directions subject to the deposit of the impounded amounts.

In their defence, the noticees denied any connection with each other or with Unifi and contended that their trades were independent. They argued that there was no possession or communication of non-public information and that similarities in trading patterns were coincidental.

“I find that there is a reasonable justification for the stated delay in issuance of Interim Order in this matter. I also note that the Noticees have not shown as to how the purported delay has prejudiced them from defending themselves against the allegations.”

On the admissibility of electronic evidence, SEBI noted that data retrieved from seized devices was duly certified under Section 65B of the Indian Evidence Act and that there was no allegation of tampering.

On merits, SEBI concluded that the noticees were directly or indirectly in possession of non-public information regarding Unifi's impending trades.

“Moreover, in view of the irrefutable evidence discussed hereinbefore, I am not even slightly convinced by another disingenuous argument made by Noticees 2, 3 and 4 that they did not know that Noticee 1 was employed with a stock broker or had information about the trades of Big Client.”

The order relied on frequent communication between the noticees, use of common trading terminals and IP addresses, the pattern of placing trades ahead of Unifi and squaring them off thereafter, and arrangements for sharing profits.

It found a consistent trading pattern where the noticees traded ahead of Unifi's orders, often in the same direction, and exited positions close to its trades to exploit price impact.

SEBI also rejected the argument that intent must be proved to establish fraud under the PFUTP Regulations, holding that mens rea is not an essential ingredient for a civil violation.

“Even so, I find that the state of mind, or scienter, in respect of the Noticees is brought out in the present case by direct digital evidence as well as circumstantial evidence of trades based on knowledge of price and timing details of the Big Client's order, which were passed on in the form of instructions from Noticee 1 to Noticee 2, who in turn used it for placement of trades in the accounts of various front runners, directly or indirectly.”

Accordingly, SEBI restrained the noticees from accessing the securities market for varying periods, directed disgorgement of ₹1.29 crore along with interest, and imposed penalties aggregating to Rs. 1.52 crore.