The Securities and Exchange Board of India, through an interim order-cum-show cause notice dated 28 February 2023, barred 21 entities from the securities market in connection with the front-running of trades of Axis Mutual Fund. SEBI directed the impounding of Rs. 30.56 crore of wrongful gains and restrained the entities, including former Axis Mutual Fund chief dealer Viresh Joshi, from buying, selling, or otherwise dealing in securities in any manner until further orders.
Background
SEBI's investigation revealed that Viresh Joshi, who served as the chief dealer at Axis Mutual Fund, had access to non-public information regarding the fund's proposed trading activities. The investigation, covering the period from September 2021 to March 2022, established that Joshi had communicated impending trade information to associates, who then executed trades ahead of the mutual fund's large orders to profit from the anticipated price movements.
Front-running involves trading securities based on advance non-public knowledge of pending orders that are expected to influence the market price. The practice is prohibited under the SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003, as it causes harm to the interests of mutual fund unitholders whose returns are diminished by the front-run trades.
SEBI deployed sophisticated analytical methods in its investigation, including analysis of mobile tower location data, Bloomberg chat records, trading pattern analysis across 25 brokers, and financial flow mapping to establish the connection between the 21 entities.
Key Provisions
The SEBI order directed the following:
Market ban: All 21 entities were restrained from buying, selling, or otherwise dealing in securities, directly or indirectly, in any manner whatsoever until further directions from SEBI.
Impounding of gains: SEBI ordered the impounding of Rs. 30.56 crore, being the cumulative unlawful gains made by the entities through front-running activities. The entities were directed to deposit this amount in an escrow account with a lien in favour of SEBI.
Asset freeze: The entities were prohibited from disposing of or alienating any of their assets, including shares, mutual fund units, and bank deposits, pending the completion of proceedings.
Broker compliance: Stock exchanges and depositories were directed to implement the debarment orders and ensure that no transactions were executed on behalf of the restrained entities.
Investigation scope: SEBI's investigation identified a complex network of entities through which the front-running scheme was operated, including individuals based in Dubai who received trade information via encrypted messaging applications.
Implications for Practitioners
This enforcement action represents one of the largest front-running cases in Indian securities market history by quantum of impounded gains. Securities law practitioners should note SEBI's increasing sophistication in deploying technological tools — including telecom tower data and messaging platform analysis — to establish front-running networks.
For mutual fund compliance officers, the case underscores the need for robust information barriers between dealing desks and external parties. The fact that the chief dealer was able to communicate trade information to external associates over an extended period suggests failures in the fund's surveillance systems and compliance framework.
Practitioners advising asset management companies must review internal controls governing dealer communications, including personal device usage policies and monitoring of encrypted messaging platforms. The SEBI order makes clear that regulatory technology has advanced to a point where communication patterns can be forensically reconstructed even when parties attempt to use secure channels.