Front running is the act of buying or selling securities ahead of a large transaction so as to benefit from the subsequent price change. This is usually done by persons dealing in the market who have prior knowledge of such large transactions or by someone related to them. In its earlier ruling, Dipak Patel v. SEBI, the Securities Appellate Tribunal (SAT) relied on regulation 4(2)(q) of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 (FUTP Regulations), to hold that front running done by intermediaries alone would be a fraudulent practice actionable under law.
Overturning its earlier incorrect ruling, SAT has held in the case of Vibha Sharma v. SEBI, that ‘front running’ even by a person other than an intermediary is illegal. In this case, the offender traded shares a few hours in advance of when large volumes of the same shares were traded by her husband, an equity dealer working at and trading on behalf of a large public sector bank. SAT held that front running is always injurious to the market and must be punished whether done by an individual or an intermediary.
Almost simultaneously, on 6 September 2013, an amendment to the FUTP Regulations was notified, clarifying that the list of offences under regulation 4(2) is not exhaustive. Further even if the regulations do not list a particular act as ‘fraudulent’ or ‘unfair trade practice’ or describe such an act as being committed only by a certain category of persons, it will still be prohibited if the act falls within the general prohibition on fraud and unfair trade practices. Both developments will ensure that such fraudulent practices of front running will be dealt with severely by the regulator.