A magician plotted an illegitimate scheme to garner millions of Rupees quietly. When he thought he would get away with his dexterity, the market regulator called his bluff.

Recently, the Securities and Exchange Board of India (SEBI) issued an Interim-order-cum-Show-cause Notice to Viresh Joshi — the prime accused in the Axis Mutual Fund front-running case — who the regulator termed as Jadugar or magician, and 20 others who were involved in unveiling their modus operandi.

Given the sensitivity of the topic and its importance for the future of mutual fund regulations in India, this Interim Order-cum-Show Cause Notice merits serious attention.

At PersonalFN we have been covering this case quite closely since it came to light. We have time and again stated that investors should prefer mutual fund schemes that follow sound investment systems and processes. However, the front-running case at Axis Mutual Fund has been archetypal of how even strong systems easily get compromised when employees of the organisation holding top positions lack honesty, integrity and a sense of responsibility.

Here are the highlights of the SEBI’s Interim Order-cum-Show Cause Notice dated, 28th February 2023:

  • 21 entities or noticees are restricted from buying, selling or dealing in the securities market, directly or indirectly, in any manner whatsoever until further orders.

  • Noticees are required to close their derivatives positions or square-off their trades within three months from the date of order or at the expiry, whichever is earlier.

  • The regulator has directed that the money garnered through wrongful gains shall be impounded from noticees. In this regard, a window of 15 days is offered to the noticees to deposit the aggregate amount of Rs 30.6 crore in an interest-bearing Escrow Account or Savings Account with a lien marked in favour of SEBI in a nationalized bank.

  • The regulator has directed banks to restrict the debits from bank accounts of noticees up to the amounts earned through wrongful trades.

  • Noticees can't transfer or redeem their investments including those in mutual funds. Moreover, they can't dispose off or sell any assets/properties/securities without SEBI's approval until the amount of wrongful gains is credited to either the Escrow Account or Savings Account with a nationalized bank with a lien marked in favour of SEBI.

  • Within 7 working days from the date of the interim order, noticees are also required to provide a complete record of all financial, non-financial assets, movable and immovable properties including details pertaining to substantial/controlling interests in companies.

  • The capital market regulator has given 21 days to noticees to file their response from the date of receipt of the interim order cum show cause notice.

The 21 entities or noticees to whom the Interim-order-cum-Show-cause Notice is issued are:

Sr. no. Noticees Barred by SEBI
1 Viresh Joshi
2 Sumit Desai
3 Pranav Vora
4 Vaibhav Pandya
5 Prijesh Kurani
6 Dharini Kurani
7 Rekha Kurani
8 Bharti Navnit Godaya
9 M K B Bespoke Audio General
10 Bindesh Kurani
11 Nishil Surendra Marfatia
12 Olga Trading Pvt. Ltd.
13 Krunal Khamar
14 Kamlesh Arjundas Dhanrajani
15 Bhavin Shah
16 Rupal Bhavin Shah
17 Visa Capital Partners
18 Suresh K Jajoo
19 Vimal S Jajoo
20 Ankit Jajoo
21 Sheepra Sumeet Kabra

How did the capital market regulator arrive at this decision?

The following two factors were considered the most crucial ones to decide whether the trading activities were instances of front-running:

  • Beforehand knowledge of unpublished information about a large pending trade in a particular security.

  • Whether the orders are executed, directly or indirectly, by the front-runner ahead of a large order placed by a big client/entity in a particular security.

In such a case, the trading activity of the front-runner has to be closely in sync with that of the big client.

Usually, what’s the process followed at fund houses for buying and selling securities in various schemes?

  • The day-to-day management is the responsibility of a fund manager.

  • The fund manager is also responsible for stock selection and portfolio construction.

  • The fund manager, while placing an order in Bloomberg Order Management System, mentions the reasons or rationale.

  • The dealer team, on the other hand, is responsible for trade execution.

  • Whether to place an order through multiple brokers or involve only a handful of empanelled brokers is a routine decision that the dealer's desk at the fund house takes.

In other words, the fund manager decides which stocks to buy along with their quantities/weights or a percentage of specific schemes along with price limits. For instance, buy 1 lakh shares of XYZ limited below Rs 250/share. On the other hand, the dealer decides when and how to execute the order in the given market situation, stock liquidity and order size.

In the case of Axis Mutual Fund, SEBI has found that the potential leakage of unpublished information happened at the dealer’s end and not from any particular trading members empanelled with the fund house. The list of brokers empanelled with Axis Mutual Fund is quite diverse.

In front-running cases, the ‘timing’ of large orders matters the most since it may considerably influence stock prices if the volumes are outside the range of normal volumes over the last 7-10 days.

Viresh Joshi (who was the Chief Trader & Fund Manager – Equity at Axis Mutual Fund) had access to unpublished information about large unexecuted trades of Axis Mutual Fund. He tipped off and directed his syndicate to front-run.

The regulator also observed that…

  • There was no immediate physical supervision on Viresh Joshi, both at home and in the dealing room in the office.

  • He had multiple cell phone numbers while had declared only one of them to the fund house and carried the other to the workplace.

  • Not only he had access to confidential information but also had undisclosed means to circulate unpublished information required for front-running

The capital market regulator is prima facie satisfied with the evidence to infer that the majority of profits garnered on intraday transactions during the period of investigation by Marfatia Group, Woodstock Group and Kurani Group—who were partners of Viresh Joshi in fraudulent transactions –were on account of front-running. The trades were pre-meditated, confirmed to a well-crafted manipulative scheme and couldn’t be attributed to mere coincidence.

The conduits of Viresh Joshi, termed as Jadugar in the Interim Order-cum-Show Cause Notice, made Rs 30.6 crore of wrongful gains and Mr. Joshi received the gains of his wrongful trades done through his syndicate outside the conventional banking channel.

SEBI has held no qualms in expressing its displeasure over the blatantly dishonest behaviour of the senior official of a mutual fund house. Here are the comments of the whole-time member of SEBI undersigning the interim order:

At a time, when SEBI is extensively engaged in investors' education and is taking series of steps to win investors' faith in the securities market, indulgence in such heinous acts of market manipulation and fraudulent trade practices as have been blatantly displayed by a senior official of a mutual fund like Mr. Viresh Joshi has caused serious breach of trust reposed by the investors/unit holders of Axis MF and can potentially cause further erosion of the trust in mutual funds per se as a medium of investment in securities market.

This article first appeared on PersonalFN here

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