New Delhi: Taking advantage of the work-from-home option during the pandemic, a former fund manager of Axis Mutual Fund (MF) and 20 others allegedly made wrongful gains worth Rs 30.56 crore through their front-running activities.
The Securities and Exchange Board of India (SEBI) Tuesday issued an interim order barring Axis MF’s former chief dealer Viresh Joshi and 20 other individuals and entities linked to him from accessing securities markets due to their involvement in a front-running case the markets regulator had been investigating.
Front-running is a form of insider trading. An entity uses information that’s not yet available to the public to buy or sell securities or enter into contracts in anticipation of the fact that once the information becomes public, the price of such securities or contracts will change along predicted lines. In other words, it is the practice of misusing privileged information to make personal profits, and is illegal.
The SEBI identified Rs 30.56 crore as ill-gotten gains and directed that this amount be impounded from the entities, according to the order. It also found that Joshi was given the moniker ‘Jadugar’ in all of his WhatsApp conversations with his implicated associates.
“During the course of investigation, it was noted that the noticees connected to Mr. Viresh Joshi, the then chief dealer of Axis MF, were observed to have traded in different securities ahead of the impending orders placed on behalf of the Big Client (Axis MF),” SEBI’s interim order read.
The investigation was carried out between 1 September 2021 and 31 March 2022.
The other main gainers of the front-running activities who were named in the report include four officials of the Marfatia Group — the ‘wrongful gain’ of which amounted to Rs 9.5 crore — the Woodstock Group (Rs 14.07 crore), and the Kurani Group (Rs 6.99 crore).
After the impending order was placed by Axis MF, these connected people and entities squared off their earlier trade positions taken on the Exchange platform.
“In the process, substantial proceeds of profit were generated in the trading accounts of these connected noticees, by placing orders ahead of and in anticipation of the price movement of scrips in a certain direction on account of the impending large buy/sell orders of the Big Client,” the order said.
Such front-running occurrences were noticed on “numerous occasions during the investigation period”, it added.
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‘Jadugar’, aides ‘took advantage’ of working unsupervised
The investigation found that Joshi and his associates took advantage of the work-from-home option “with no immediate physical supervision” during the pandemic.
“Further, due to Covid pandemic, apart from having an option to work from home, the dealers of Axis MF were also given separate dealing rooms to ensure social distancing,” the order said. “The available records indicate that Mr. Viresh Joshi during the investigation period was working from home as well as from office where he had his own separate dealing room.”
According to two emails dated 22 September 2022 and 17 November 2022, Axis MF had authorised the installation of Bloomberg software — used by market participants — on the laptops of all their dealers so that they could conduct market transactions from their residences.
“From the above, it can be prima facie observed that Mr. Viresh Joshi had no immediate physical supervision both at home and in the dealing room in the office,” it added.
Further, the investigation found that Joshi had two phone numbers, but had declared just one to Axis MF. It was established that not only were the two numbers located at the Axis MF office on dates significant to the investigation, but also that Joshi himself was also present at the office on those dates. This effectively established that it was Joshi using the phones and not somebody else.
Therefore, because of his private/isolated working environment both at office and at home, Joshi “prima facie had the opportunity to pass on the non-public information about the impending trade orders of the Big Client received by him from the fund manager through Bloomberg Order Management System”.
The order further pointed out that he “also had the means (i.e. the second undisclosed mobile number) to communicate the same to the outside world, as Axis MF would never inquire about his second mobile number”.
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‘Serious breach of trust’
The SEBI order noted that the actions of a senior official such as Joshi “has caused serious breach of trust” reposed by investors in not only Axis MF, but also possibly in mutual funds themselves as a medium of investment.
As such, “it is a fit case to pass interim directions to insulate the securities market from the mischievous acts of the noticees as well as to protect the wrongful gains from getting siphoned off beyond the regulatory reach”.
The SEBI order thus banned the noticees from accessing the securities markets, and also ordered impounding of Rs 30,55,89,668.96 (Rs 30.56 crore) as being the total wrongful gains from the front-selling activities.
“The noticees… are directed to credit/deposit the aforesaid amount of wrongful gains into an interest bearing escrow account or savings account with a lien marked in favour of SEBI created specifically for the purpose in a nationalised bank,” the order said, adding that the amount kept in these accounts should not be released without permission from SEBI.
(Edited by Anumeha Saxena)
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