How Sebi uncovered front-running in Madhav Stock Vision case

Mint

25-04-2025

In a 127-page interim order that could set a new benchmark for market surveillance, the Securities and Exchange Board of India (Sebi) has charged Mumbai-based broker Madhav Stock Vision Pvt. Ltd (MSVPL) and five individuals for front-running the trades of a large institutional investor, referred to as the 'Big Client."
Sebi restrained Madhav Stock from dealing in securities in its account and prohibited the individuals from dealing with securities, directly or indirectly, until further orders.
What sets this order apart is the holistic integration of technological evidence to reconstruct the
modus operandi
of the accused in real time, experts say.
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The order of April 23 marks a pivotal shift in Sebi's enforcement strategy—one that blends IP log analysis, telecom data, and chat forensics to trace real-time information leaks and manipulation.
"Sebi has effectively uncovered real-time information leakage and front running," Abhiraj Arora, partner at Saraf and Partners, said. 'This approach enhances the regulator's ability to detect and prove complex financial crimes with concrete digital evidence, marking a significant advancement in enforcement practices."
At the heart of the case is an unusual operational detail: four different brokerages, all empanelled with the Big Client, operated from the same commercial complex—Kemp Plaza in Malad, Mumbai.
This proximity allegedly allowed two key individuals—Jyotiswaroop Purohit and Pankit Jhaveri, both affiliated with Broker no.1—to eavesdrop on phone calls made by dealers of other brokers to the Big Client.
These details were then allegedly passed to Rajesh Jhaveri and Ajay Jain, dealer and director of MSVPL, who placed their trades ahead of the Big Client's, profiting from predictable price movements. Most calls between these individuals occurred during market hours, suggesting a high level of coordination.
"Taking advantage of this proximity, Purohit and Pankit Jhaveri passed on the non-public information pertaining to the impending order of the Big Client to the dealer/director of Madhav Stocks," the order by Whole Time Member Kamlesh Varshney noted.
Profits from the trades were reportedly routed through relatives falsely shown as employees of MSVPL and paid under the guise of salaries. Bank records corroborated this flow of funds.
Sebi's investigation relied heavily on technological tracing. Using IP logs and internet service provider data from Airtel, the regulator tracked the locations from which the trades were placed. All roads led back to G-1 Kemp Plaza—used by multiple brokers and MSVPL.
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Investigation showed that orders were placed through NSE and BSE Technology terminals at the same address. Chat transcripts and phone call recordings showed real-time reactions to emails from the Big Client, with accused individuals adjusting their trades within seconds of receiving or overhearing information.
One intercepted conversation detailed plans to plant a mobile phone in a pocket to listen in on
trading
cabins. In another, instructions from the Big Client were relayed within seconds and acted upon instantly.
'Legally, this sets a precedent," said Kunal Sharma, partner at Singhania & Co. 'When circumstantial digital evidence is corroborated across platforms—IP logs, call data, chats— to establish intent and participation in market abuse under Sebi regulations."
Sebi's investigation team also conducted raids at 11 premises, including the residences and offices of three accused. Laptops, mobile phones, and routers were seized, and digital images were preserved. Statements were recorded to corroborate digital findings.
The case raises serious questions about inter-broker operational setups and how shared infrastructure can create vulnerabilities in confidential order handling.
'Companies may now need to evaluate not only digital safeguards but also the physical security of shared spaces," said Zubin Morris, partner at Little & Co. 'Restricting the use of unauthorized communication tools and ensuring that confidential information is protected from unauthorized access."
It also calls attention to the role of institutional clients who rely on multiple brokers for execution. Experts say clients must revisit their engagement models and adopt stricter communication protocols.
'Institutional clients would be wise to re-look at their present arrangements with empanelled brokers to ensure that adequate measures are already in place and are being enforced effectively to hedge themselves against any misuse of their trading information", Tomu Francis, partner at Khaitan & Co., said.
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Francis added that the regulator may be moving to a principle-based approach, requiring market participants such as stock brokers, mutual funds, PMS, etc., to implement surveillance and fraud detection mechanisms to root out any suspicious activity.
"Such preventative measures, while might be burdensome so far as cost of compliance is concerned, is a better alternative to post-facto enforcement action, which while acting as a deterrent, falters so far as investor protection is concerned since the damage is already done," he said.
The case could become a reference point for enforcement based on circumstantial digital evidence, provided the chain of custody and authenticity are maintained.
'Courts may increasingly recognize such evidence as admissible provided chain of custody and authenticity standards are strictly maintained," said Sharma, adding that the order demonstrated Sebi's decisive move toward aligning its enforcement framework with global regulators from the US and UK.
The regulator's move may also trigger changes in corporate governance expectations. Directors may be held more accountable if they facilitate or fail to stop fraud.
"Holding directors accountable for their companies' actions, especially if they facilitated or ignored fraudulent activities, sets a stronger precedent for piercing the corporate veil in market abuse cases," Arora said.
Meanwhile, Morris believed this trend could result in more stringent expectations for corporate leadership with a possible cultural shift within the corporate sector, where directors take a more hands-on approach to compliance and risk management.
He also anticipated a "shift towards brokers who can guarantee stronger safeguards for sensitive information" and likely increased emphasis on "contractually binding confidentiality agreements". "In short, this case could prompt a broader industry shift towards more robust controls over sensitive trading data", Morris said.
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Sebi has issued show cause notices to all the accused, asking why suitable directions should not be issued against them for the alleged violations.​ It has also asked for a fee of over
₹
2.72 crore, the alleged illegal gains, to be impounded in a fixed deposit jointly and severally amongst the accused within 15 days.