Ketan Parekh: Inside Sebi’s 30-month front-running probe
Source: Live Mint
“If the stock market is one of the movers of the new Indian economy, Parekh is one of the prime movers of that market…legend has it IPOs are filed with Parekh before they hit the market,” an India Today article from February 2001, stated.
Later, he was implicated for orchestrating the 2001 stock market scam that caused a market crash and banned from participating in the securities market for 14 years.
Last week, Parekh made the headlines yet again—he has been accused of facilitating manipulative trades using insider information. People involved in the alleged scam profited ₹38.7 crore. Additionally, a Singapore-based trader, who provided non-public information to Parekh, earned ₹27.07 crore in commission fees from two Indian financial firms, the Securities and Exchange Board of India (Sebi), India’s market regulator, said. Sebi is now seeking the return of this money, ₹65.77 crore in total, from 18 executives involved.
It is unclear what prompted Sebi to initiate this investigation. But probing Parekh, his network, and his trade was no easy task—it took 30 months. Here’s a detailed dive into how a mesh of phone numbers, chats, traders, and brokerages was slowly untangled.
Text from Bhabhi
Between 22 and 24 June 2023, Sebi conducted searches at 17 different locations—13 places in Kolkata and four in Mumbai.
It meticulously evaluated the bank accounts and mobile phone identification numbers, including the International Mobile Equipment Identity (a number for identifying a device) from seized phones.
In addition, the regulator examined WhatsApp messages as well as chats on Bloomberg Terminals belonging to several traders. It matched Parekh’s call records with those of his alleged accomplices, during his stays at five-star hotels across the country, including in Jaipur, Vadodara, Kochi, and Kolkata, between 2021 and June 2023. Sebi next sought information from Singapore’s financial regulator.
Throughout this cat-and-mouse game with the regulator, Parekh employed various tactics to cover his tracks. Now 62, he utilized 10 different mobile numbers to communicate with his associates. Eight of these numbers belonged to six different people from Ahmedabad and Mumbai. According to Sebi, none of the numbers were in Parekh’s name, and he used mobile numbers registered under multiple people to “disguise his identity”. Many people who interacted with him saved his name under pseudonyms such as ‘Jack’, ‘John’, ‘Boss’, ‘Well-wisher’, and ‘Bhabhi’.
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Interestingly, Parekh also devised a clever method for making payments—through a trusted network of couriers known as angadias, a Gujarati term that refers to individuals who transport goods.
Sebi’s extensive investigation culminated in an 188-page interim order, which concluded that Parekh had orchestrated a scheme to “front run” stock sales and profit from non-public information.
An interim order is a temporary decision by Sebi to address immediate concerns or prevent further loss during an ongoing investigation. It remains in effect until the regulator reaches a final decision after hearing all parties involved, including those it has issued show-cause notices to.
Long and short
This is how the alleged fraud played out.
An unnamed US-based fund house (called ‘big client’ by Sebi), actively investing in Indian securities, routed its trades through two intermediaries—Nuvama Wealth Management Ltd and Motilal Oswal Financial Services Ltd. The two firms had a a referral agreement with a company owned by Rohit Salgaocar, a Singapore-based trader. Traders executed orders based on the instructions of Salgaocar.
However, non-public information regarding impending large trades by the US-based fund house was allegedly relayed from Salgaocar to Parekh, who then directed six front-runners to execute trades in advance. These front-runners took positions in specific scrips ahead of the big client’s large orders. When these orders were placed, the front-runners executed counter positions designed to match the big client’s trades.
This strategy allowed the front-runners to either square off their initial positions or create excess long or short positions in the scrip, which they would then close during the same trading day, generating undue profits in a short span.
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The consultant
The interim order, issued on 2 January and signed by Kamlesh C. Varshney, one of Sebi’s eight board members, stated: “Noticee no. 1, 2, and 10 shall be restrained from buying, selling, or dealing in securities or associating with any intermediary registered with Sebi, either directly or indirectly, with immediate effect.”
Who are these characters?
Parekh is noticee no. 2, while his old accomplice and broker, Ashok Kumar Poddar, is noticee 10. Poddar faced a ban during the 2001 stock market manipulation as well.
Noticee no. 1 is Rohit Salgaocar.
Not much public information is available about Salgaocar, and there are no photographs of him online. According to some filings with the Singapore Stock Exchange, Salgaocar began his professional career at the now-defunct investment bank Bear Stearns, followed by brief stints at Credit Agricole Securities (Asia) Limited, Religare Capital Markets (Hong Kong), and BTIG Hong Kong Ltd.
In 2016, he founded Strait Crossing Pte Limited (SCPL), a Singapore-based firm, where he serves as the managing director and sole director. As SCPL is an “exempt private company”, the firm has fewer compliance requirements. Unlike most private or public companies registered in Singapore, an exempt private company by shares does not have to file annual financial statements.
In early 2021, Salgaocar, through SCPL, inked a memorandum of understanding or a referral agreement with Motilal and Nuvama for revenue sharing of the brokerage earned on trades of the big client referred by SCPL. Under this agreement, Salgaocar earns 75% of the net brokerage fee from the trades of the US-based fund.
This referral agreement between SCPL and Motilal/Nuvama is arguably the most surprising part. Why?
“I’m unsure if Rohit Salgaocar or Strait Crossing Pte are registered in India,” said the head of a brokerage firm on the condition of anonymity. “The other important point: Why does the US-based fund need a broker when it already has Motilal to help execute the trades? This referral arrangement is more common for high-networth individuals and not for institutions or funds,” the executive added, noting that typically, the referral fee is between 5 and 15%. Agreeing to part with 75% of the brokerage income is, therefore, uncommon.
We will circle back to the issue of referrals in a bit.
Meanwhile, traders from the two brokerages consulted Salgaocar before placing orders for the US-based firm—this armed him with insider information on stocks. Salgaocar shared this information with Parekh, who then executed trades through a Kolkata-based cabal of brokerages and executives.
“Dealer of the big client provides me with the name of the stock they are interested in. I will check the availability with different market participants, including foreign funds, Indian funds, other holders of the shares etc. and lastly with Ketan Parekh. After confirming the availability from the counterparty, I get back to the dealer of the big client with the quantity and price on offer,” Salgaocar told Sebi. “Upon confirmation from the dealer of the big client, the deal goes through. The big client dealer sends the deal ticket to the broker in India. After the execution of the trades, an Indian broker used to confirm me on Bloomberg chat. Sometimes, I used to get confirmation from big client dealers as well,” said Salgaocar.
Traders from the two brokerages consulted Salgaocar before placing orders for the US-based firm—this armed him with insider information on stocks. Salgaocar shared this information with Parekh.
How did Salgaocar know Parekh?
“My ex-father-in-law, Dev Ahuja, introduced me to Ketan Parekh sometime in the late 1990s,” Salgaocar told Sebi.
Dev Ahuja, or Devendra Ahuja, was a banker who promoted the erstwhile Centurion Bank, according to two executives. Before Ahuja passed away in 2010, multiple authorities probed him over his ties with Parekh. This included Ahuja appearing before a joint parliamentary committee in October 2001. Ahuja was never convicted of any wrongdoing. Ahuja’s daughter Munisha was married to Salgaocar before they separated.
“I re-contacted Ketan around 2 1/2 -3 years ago for trade in some illiquid stock of the big client. That’s how I started contacting him for blocks,” Salgaocar told Sebi.
Salgaocar shared the US-based firm’s trading approach for six companies with Parekh between 2021 and June 2023, the regulator’s probe alleges. These six companies are HDFC Ltd, Titan Ltd, L&T, PB Fintech Ltd, Cholamandalam Investment and Finance Co. Ltd, and Tube Investments of India Ltd.
Parekh next engaged his six front-runners to execute the orders before the US-based firm could buy or sell them.
Mint could not reach Parekh and Salgaocar for comments.
Pack of six
According to the probe, the front-runners include two brokerages (GRD Securities Limited and Salasar Stock Broking Ltd), two individuals (Ashok Kumar Damani and his nephew Anirudh Damani) and two companies (APR Properties Pvt. Ltd and Basukinath Properties Pvt. Ltd). Together, they made ₹38.7 crore from the alleged scam.
APR Properties Pvt. Ltd and Basukinath Properties Pvt. Ltd count Rachit Poddar as directors. Rachit’s father, Ashok Kumar Poddar, is a close associate of Parekh, Sebi said. Ashok, a Kolkata-based broker, provided broking services to Ketan Parekh, and both were banned from the securities market in the aftermath of the stock market scam of 2001.
According to the interim order, Ashok told Sebi that Parekh used to provide trade-related instructions to him over WhatsApp calls and messages. Subsequently, Ashok relayed this information to Rachit, who bought and sold stocks through the trading accounts of APR Properties and Basukinath Properties.
“I am of the view that the FRs (front-runners) were fully aware about the nature of the fraudulent trading activity being committed through their trading accounts since they were aware that the trading instructions received from Ketan Parekh were based on some non-public information relating to the scrips in which they were executing trades,” wrote Varshney, Sebi’s whole time member, in the order.
Sebi has implicated Priya Saraf, an independent director at GRD Securities, and Pradeep Kumar Saraogi, an independent director at Salasar Stock Broking. Even though independent directors do not oversee a company’s daily operations, Sebi has said that there is direct evidence of their involvement in the scam.
“Sebi has made the independent directors Priya Saraf and Pradeep Kumar Saraogi prima facie guilty as their physical computer systems were used for trading. If found guilty, they should be made personally liable,” said Tushar Ajinkya, managing partner at ThinkLaw, a Mumbai-based law firm.
Emails sent to Salasar Stock Broking’s directors (Kiran Kumar Sonthalia and Shyam Saraogi), Rachit Poddar and Anirudh Damani did not elicit a response.
Are referrals wrong?
So, was the agreement between SCPL and Motilal/Nuvama wrong? This question arises as Sebi has called the ₹8.06 crore and ₹19 crore commission income earned by Salgaocar from Motilal and Nuvama, respectively, “unlawful gain”.
“The referral arrangement per se is not illegal. Sebi’s issue is that the dude doing the referral was then front-running that information,” said the founder of a portfolio management services company on the condition of anonymity. “Front-running is illegal.”
“Sebi’s focus here is on the intent and source of the revenue rather than the legality of the referral agreement itself,” said Sumit Agrawal, founder of Regstreet Law Advisors and a former Sebi officer.
When asked why Sebi did not issue notices to Motilal and Nuvama, Agrawal said that it was probably because based on the available evidence, there is no direct link suggesting that the brokerages knowingly facilitated misuse of non-public information.
“The referral agreements themselves may not violate Sebi’s norms, but how the Singaporean citizen’s company executed them could have led to unlawful gains.
Without evidence implicating the brokerages in these activities, Sebi would be cautious in taking regulatory action against them,” said Agrawal.
A detailed questionnaire sent to Motilal and Nuvama went unanswered.
What’s next?
Sebi’s final decision may modify, withdraw, or confirm the interim order. Legal experts say that in a complex case like the current one, the process to arrive at the final order could take over a year. During this period, Parekh and others named can appeal to the Securities Appellate Tribunal, the High Court, or the Supreme Court for a stay, challenging the investigation and the show-cause notice.
“Sorry, this is not the right time to comment on this matter as it is sub judice, but we will be filing an appeal with the appropriate authority against this order next week,” said Bimal Drolia, co-founder of GRD Securities, in response to a detailed inquiry sent on Friday.
Meanwhile, some lawyers say there is a case for harsher punishment, like a lifetime ban, for repeat offenders.
But that could lead to a constitutional challenge for violating the fundamental right to practice a trade and profession, Chirag M. Shah, a senior securities lawyer, said.
“In such a case, even if someone begins to deal with the securities market indirectly, Sebi will not be able to keep a tab,” Shah said.
