SEBI Bars 4 Entities From Securities Market For 2 Years, Orders ₹2.64 Crore Disgorgement In Sarvottam Front-Running Case

The Securities and Exchange Board of India (SEBI) has held four entities guilty of front-running trades of Sarvottam Securities Pvt Ltd. The regulator ordered disgorgement of Rs 2.64 crore, barred them from the securities market for two years, and imposed a penalty of Rs 5 lakh each.

SEBI's quasi-judicial authority, N. Murugan, found that a dealer at Findoc Investmart Pvt. Ltd. had misused access to non-public information regarding impending orders of the client to execute trades in advance, including through accounts of his family members.

SEBI initiated proceedings based on an NSE examination report indicating that a group of related entities trading through Findoc Investmart Pvt Ltd and Kotak Securities Ltd were consistently placing trades ahead of the big client in the equity derivatives segment. It was alleged that in most cases, their square-off orders trades were matched with the orders of the big client.

The investigation revealed that a dealer at Findoc, Sunny Bhatia, allegedly had access to material non-public information regarding impending orders of the big client and used it to execute trades in his own account and in the accounts of his family members.

The other noticees admitted that their trading and bank accounts were managed by him. The noticees repeatedly traded in the same scrips as the big client, largely through intraday transactions, generating substantial profits, with a significant number of instances reflecting a front-running pattern.

SEBI accordingly issued a show cause notice alleging misuse of non-public information, front-running, and violations of the SEBI Act and PFUTP Regulations, and proposed disgorgement and penalties.

The noticees contended that the show cause notice failed to establish how, when, or through whom they allegedly obtained advance knowledge of the big client's trades. They argued that there was no evidence of any communication, including call records or emails, nor any financial or fiduciary relationship linking them to such information.

SEBI, however, observed that Bhatia was working as a dealer at Findoc during the investigation period and that the big client had been a client of Findoc since 2018. It noted:

“From the analysis of the said CTCL data, I note that in the year 2018 the orders of Sarvottam were punched through 11 CTCL IDs. Out of these IDs, 67.88% of the orders were punched through CTCL ID “141001001016” which pertains to Noticee no.1. I further note that during the period from 2019 to 2022 the orders of Sarvottam were placed through 21 CTCL IDs, out of which 17.69% of the orders were placed through the same CTCL ID “141001001016” belonging to Noticee no.1.”

The regulator noted that a substantial portion of the orders of the big client were executed through the terminal ID of Bhatia.

Rejecting the defence, SEBI held that the absence of call records, emails or financial linkages was not determinative, as Bhatia had access to information on impending orders by virtue of his position in the dealing room.

It further noted:

“From the said 728 instances of trading with the advance information of the substantial impending transaction of the Big Client Noticees have generated profit Rs.264.79 Lacs during the investigation period.”

SEBI also observed that the noticees' advance knowledge of the big client's impending orders stood independently established from material on record and was not merely inferred from their trading pattern.

“I note that out of 1,352 total instances, as many as 906 instances (67.01%) are common with the Big Client. This is not a marginal but a dominant portion of the Noticees' trading activity.” it stated

It concluded that the overall trading conduct indicated the presence of prior knowledge rather than coincidental market behaviour.

Holding that the conduct amounted to fraudulent and unfair trade practices, SEBI directed disgorgement of Rs 2.64 crore, debarred the noticees from the securities market for two years, and imposed monetary penalties.