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What is front running? The illegal practice that led Axis Mutual Fund to crack down on staffers

Axis AMC says it has been conducting an investigation over the last two months, 'with the help of reputed external advisers', into potential irregularities.

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New Delhi: On the evening of 4 May, two fund managers of Axis Mutual Fund — Viresh Joshi and Deepak Agrawal — discovered that their IDs, which allowed them access to the Bloomberg terminal for carrying out trades, had been suspended

The Axis Mutual Fund collectively manages investments worth Rs 2.59 lakh crore.

By 6 May, it was clear that the two traders had been stripped of their role of managing seven assets for Axis Mutual Fund over allegations of front running — an illegal practice where an individual or broker uses their position to take advantage of likely price movement or change in the price of a security or asset.

Market regulator Securities and Exchange Board of India (SEBI) can initiate criminal proceedings in court against any person who indulges in unfair trade practices, including front running.

Under the SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) or SEBI (PFUTP) Regulations, 2003, any individual who indulges in fraudulent and unfair trade practices is liable to pay a penalty that may extend to Rs 25 crore, or three times the profits made out of such practices, whichever is higher.

The Axis Mutual Fund had been under market regulator SEBI’s lens for the past two years over suspected front running, Live Mint reported, quoting sources. A preliminary investigation points to front running in nine stocks that could have facilitated gains to the tune of Rs 170 crore.

“SEBI’s investigation in front running cases of Axis Mutual Fund managers is underway and there are express provisions under SEBI Act and SEBI (PFUTP) Regulations, 2003, to issue show cause notice in case of front running,” said Anand Narayan, who specialises in securities laws and works as an in-house counsel at a major private firm.

A head trader, Joshi was the fund manager of Axis Arbitrage Fund, Axis Banking ETF, Axis Nifty ETF, Axis Technology ETF, and Axis Consumption ETF. Agarwal — an equity research analyst — managed Axis Consumption ETF, Axis Quant Fund, and Axis Value Fund.

In a statement, Axis AMC (asset management company) said it has been conducting a “suo moto investigation over the last two months (since February 2022)” with the help of “reputed external advisers”.

“As part of the process, two fund managers have been suspended pending investigation of potential irregularities. We take compliance with applicable legal/regulatory requirements seriously, and have zero tolerance towards any instance of non-compliance,” the statement said. “The media is requested not to give credence to market speculation and idle gossip, which are baseless and we strongly refute the same.”

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Front running of stocks

Those accused of front running or ‘tailgating’, after getting information in advance about a big transaction due to be executed in a particular stock, invest in that stock through a personal account before the trade is executed.

For example, let us assume that a broker receives a large order of buying 500,000 shares of a particular company, which are trading at Rs 100 per share. But before executing that order, the broker buys 20,000 shares of that same company in his personal capacity.

Once the broker executes the large order, the price of the share goes up to Rs 102 and the broker sells his/her shares to generate a profit.

The term “front running” originated from the time of paper trading when individuals carried papers having clients’ orders to the main desk in a dealing room in order to execute those trades.

But the broker would run to the main desk and execute his own order using his personal account seconds before placing the client’s order — hence, tailgating the client’s order.

It is not the first time that a case of front running involving India’s stock market has made headlines.

Last year, SEBI barred three individuals associated with Reliance Capital Mutual Fund from participating in capital markets for six months for front running trades.

In December 2020, the regulator barred 16 entities from the capital markets for up to seven years for indulging in front running activities. Of the 16 entities, six were asked to disgorge illegal gains of nearly Rs 20 crore.

(Edited by Amrtansh Arora)

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