1. Introduction
Imagine the portfolio manager of a large investment fund has decided to buy ten lakh shares of a mid cap company in one single block. He places the order with his broker. Before the order reaches the exchange, the broker’s dealer quietly phones a friend and asks him to buy the same stock at the current market price. Shortly after, the fund’s order hits the exchange and the price rises. The friend sells his holding for a tidy profit. There was no rumour, no new research and no “market instinct”. This was front running. Not intelligent arbitrage, not better timing. It is a form of market abuse. It distorts price discovery and breaks the confidence a client places in his broker. The client whose order is exploited bears the immediate loss, and the market bears the rest. Indian securities law treats it as a serious regulatory violation, and the Securities and Exchange Board of India (SEBI) has pursued it through a series of closely reasoned enforcement orders.
This article explains how front running works, why it is not insider trading, and where the prohibition sits. It then turns to the Supreme Court’s decision of 2017, to how SEBI proves these cases, and to what the newest regulations demand of brokers.
2. How Front Running Works
Front running needs only one ingredient: private knowledge of a large impending order. The order must be big enough to move the price of the security once it is executed. The person who holds it may be a dealer at an institutional desk, an employee of the client, or a tippee who received it second hand. Whoever it is, that person buys or sells the same security, or a derivative linked to it, before the client’s order reaches the market. When the large order moves the price, the front runner exits and pockets the difference.
SEBI’s orders describe two standard patterns. In a Buy-Buy-Sell pattern, the front runner buys ahead of the client’s large purchase. Once that purchase pushes the price up, he sells at the higher level. In a Sell-Sell-Buy pattern, he sells ahead of the client’s large sale. When the price falls, he buys back at the lower level to close the position.[1] Both legs of the trade leave timestamps on the exchange, which is why the pattern is visible long before anyone explains how the information travelled.
A further detail decides many contested cases. Large clients rarely place one giant order. They break it into tranches, to buy or sell at more favourable prices. SEBI’s position, applied in its recent orders, is that a front runner can gain by placing his order at any time before the last or substantial tranche of the client’s order. On that approach, every first leg order placed on or before the final tranche qualifies as a front running transaction.[2] In SEBI’s view, a case does not depend on showing that the client’s order in fact moved the price. What matters is timing: when the front runner’s order was placed relative to the client’s.[3]
The information can travel by several routes. In the classic case, a dealer trades on his own desk’s order book before the client’s order goes out. In tippee front running, the dealer passes the information to a relative, a friend or a connected entity, and that person trades. In cross instrument front running, the trade happens not in the share itself but in its futures or options. That route adds leverage and makes the trail harder to see. As enforcement has improved, concealment has evolved with it. Recent orders record instructions sent through auto-deleting messages, profits shared in cash, and trades routed through the accounts of relatives.[4]
3. Front Running vs. Insider Trading
A common mistake is to treat front running and insider trading as the same wrong. They are related, but the law separates them, and mixing them up causes real problems in compliance work and in litigation strategy.
Insider trading, governed by the SEBI (Prohibition of Insider Trading) Regulations, 2015, is built around unpublished price sensitive information. That is information relating to a company or its securities which is not generally available and which would materially affect the price if it became available.[5] The information concerns the affairs of the company and its securities, and the wrong lies in trading on it before the market has it.
Front running is built on something different: order flow information. The wrongdoer knows what a client is about to do in the market, not what a company is about to announce. That knowledge arises out of the client relationship. It comes from the broking desk, not the boardroom. The price moves not because of anything the company did, but because a large buyer or seller is about to arrive.
The point can be put simply. The insider trades on what a company knows. The front runner trades on what a client is about to do. Indian law prohibits both, but through different instruments. The instrument that catches front running is built on the law of fraud rather than the law of insider dealing, and the next section shows where it sits.
4. The Legal Architecture of Front Running in India
The starting point is Section 12A of the Securities and Exchange Board of India Act, 1992. The provision contains six prohibitions, and they do different jobs. Clauses (a) to (c) prohibit manipulative and deceptive devices, schemes to defraud, and acts that operate as a fraud on any person in connection with securities. Clause (d) prohibits insider trading as such. Clause (f), which deals with acquiring control of a company in breach of the regulations, does not arise here. Clause (e) prohibits dealing in securities “while in possession of material or non-public information” in contravention of the Act, the rules or the regulations.[6] The phrase in clause (e) is wider than unpublished price sensitive information. On its terms it is not confined to company related information, and it is wide enough to reach knowledge of a client’s impending order. But clause (e) bites only where some rule or regulation makes the dealing unlawful. For front running, that work is done by the regulations on fraudulent and unfair trade practices. This is why SEBI’s front running orders charge Section 12A(a), (b), (c) and (e) read with those regulations, and not the insider trading regulations.[7]
The SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003, referred to here as the PFUTP Regulations, supply the operative prohibition. Regulation 3 forbids dealing in securities in a fraudulent manner, and mirrors the language of Section 12A on manipulative devices, schemes to defraud and practices operating as fraud or deceit. Regulation 4(1) adds that no person shall indulge in a fraudulent or an unfair trade practice in securities.[8] Regulation 4(2) then lists examples, and the example aimed squarely at front running is Regulation 4(2)(q). Since 1 February 2019, the provision has deemed fraudulent:
any order in securities placed by a person, while directly or indirectly in possession of information that is not publically available, regarding a substantial impending transaction in that securities, its underlying securities or its derivative;[9]
Two features deserve attention. First, it applies to a person, any person. The earlier version applied only to an intermediary, and the change came through the 2018 amendment to the PFUTP Regulations, which gave effect to the recommendations of SEBI’s Committee on Fair Market Conduct. Relatives, friends and connected companies all fall within it, provided the order is placed while the person holds the information. Secondly, the provision reaches the underlying securities and derivatives, which closes the cross instrument route described earlier.
The architecture behind these provisions matters more than either of those points. Regulations 3 and 4(1) contain the prohibition. Regulation 4(2) does not extend it. It lists instances that are deemed to be fraudulent or unfair, and Regulation 4(2)(q) is one entry on that list. A front running case therefore does not stand or fall on the wording of the deeming clause. If the conduct is fraudulent within Regulation 3, it is caught. The Explanation to Regulation 4(2) says exactly this, and adds one more thing. An act remains prohibited even where the listed version of it is described as being committed only by a certain category of persons.[10] The next section shows what the Supreme Court made of that.
The consequences sit in the statute. Section 15HA prescribes a civil penalty of not less than five lakh rupees, extending to twenty five crore rupees or three times the profits made from the practice, whichever is higher. The current range came in through the Securities Laws (Amendment) Act, 2014, so older copies of the Act show a much smaller figure.[11] Disgorgement is separate, and often larger in practice. The Explanation to Section 11B expressly empowers SEBI to direct a wrongdoer to give up an amount equivalent to the wrongful gain made or the loss averted. Section 11(5) sends that money to the Investor Protection and Education Fund.[12] SEBI can also restrain a person from the securities market altogether. The exposure is not only civil: Section 24 makes contravention of the Act and the regulations punishable with imprisonment of up to ten years, or a fine of up to twenty five crore rupees, or both.[13]
5. The Supreme Court Draws the Line
Until 2017 there was a genuine doubt at the centre of this field. Regulation 4(2)(q), as it then stood, spoke only of intermediaries, and the Securities Appellate Tribunal had held in the decisions under appeal that front running by anyone else fell outside the net. The question reached the Supreme Court in SEBI v. Kanaiyalal Baldevbhai Patel, a common judgment of 20 September 2017 that decided a batch of appeals.[14]
The leading appeals map the standard routes of leakage. In the first, Dipak Patel, the portfolio manager of Passport India Investment (Mauritius) Limited, passed information about the fund’s impending orders to his cousins Kanaiyalal and Anandkumar Patel, who traded ahead of the fund and profited. In the second, Sujit Karkera and connected persons traded ahead of the orders of Citigroup Global Markets Mauritius on information supplied by a trader at that firm. The phone calls conveyed the scrip and quantity of the impending orders, together with their timing and price. In the third, Vibha Sharma traded in close alignment with the large orders of Central Bank of India, where her husband worked as an equity dealer. In each of these cases the institution was the victim whose order flow had been exploited. The persons who traded were not registered intermediaries.[15]
The Court held that this did not matter. Justice Ramana, writing the principal opinion, found Regulations 3 and 4(1) wide enough on their own terms to catch front running by persons who are not intermediaries. The listed example in Regulation 4(2)(q) did not exhaust the prohibition, and it created no safe harbour for everyone it failed to mention. Justice Gogoi, concurring, reached the same result within a narrower compass. He rested his conclusion on the definition of fraud in Regulation 2(1)(c) alone.[16]
The judgment settled two further points that now shape every front running proceeding. The first concerns intent. The definition of fraud in Regulation 2(1)(c) covers any act “committed whether in a deceitful manner or not” while dealing in securities “in order to induce another person” to deal in securities. What matters, the Court held, is not deceit but inducement, and inducement is judged by effect: whether the conduct in fact induced another person to deal. In the Court’s words, “no element of dishonesty or bad faith in the making of the inducement would be required.” Mens rea, in the conventional criminal sense, is therefore not something SEBI must prove. That is a narrower holding than it first appears. It does not mean that every trade touching non-public information is fraudulent. It means the charge can be made out by inference from the surrounding circumstances, rather than by direct proof of a guilty mind.[17] On the facts, the inference was straightforward. The cousins would never have entered the transactions had Dipak Patel not passed them the information, so his conduct induced their dealing.[18]
The second concerns proof. SEBI does not have to prove its case beyond reasonable doubt. The standard is the civil standard of preponderance of probabilities, and the case may rest entirely on circumstantial evidence. That holding shapes the way SEBI builds its cases, as the next section shows.
6. How SEBI Proves Front Running
Tippers and tippees rarely leave a confession behind. They leave a trail of circumstances. SEBI builds its cases around a set of factors drawn from V.K. Kaul and from the Rajaratnam principles.[19] Who had access to the information. What relationship connected the tipper and the tippee. When they were in contact, and how close that contact sat to the trades. What pattern the trades themselves formed. And what was done to conceal the trades or the relationship. No single factor decides anything on its own. The finding comes from convergence, when several of them point the same way at once. The threshold, as a recent order puts it, is one of “reasonable prudence to reach to a conclusion based on greater degree of preponderance of probability.”[20]
Two orders from 2026 show what this looks like in practice.
In March 2026, SEBI decided the contested portion of a matter involving front running of the trades of Societe Generale, a French foreign portfolio investor. A sales trader at the broker, privy to the client’s impending orders, was the conduit. Entities connected to him traded ahead of the client in 350 instances spread across 101 calendar days between January 2022 and December 2023.[21] The order works at the level of individual timestamps. On one trading day, a noticee’s sell order opened at 11:34:57 and closed at 11:41:00, while the client’s sell order did not begin until 11:56:02. In instance after instance the first leg was placed before the client’s order had even started, and in several instances the second leg matched the client’s contra trades at rates the order records as 100 per cent.[22] The four entities who contested the charge were each barred from the market for two years and fined five lakh rupees.[23] Several other participants, including the conduit himself, had already settled with SEBI.[24]
The following month, SEBI passed its final order in the matter of Ashok Maheshwari, a dealer at a stock broker through which Unifi Capital, a portfolio management services provider, executed nearly half of its trades.[25] The evidence shows the lengths to which the concealment went. Trading instructions travelled through auto-deleting messages on Telegram during market hours. Profits were shared in cash. The record includes a photograph of a currency note stored on a mobile phone, used to identify the recipient at the point of delivery. Tower location data placed the dealer and his counterpart in close proximity on various dates.[26]
The most damaging finding needed no confession at all. Internet service provider records showed that a trading terminal registered to a broker’s dealer had been logged into, on many days, from the residential address of the man actually placing the trades.[27] Two noticees then made false statements on oath to conceal that fact. SEBI held this to be a separate violation of Section 11C(3) of the Act read with Regulation 8(1) of the PFUTP Regulations, and penalised it separately.[28] Obstructing the investigation is its own wrong, quite apart from the front running. On the substance, SEBI directed disgorgement of unlawful gains of Rs 1,29,60,230.75 with simple interest at 12 per cent. It imposed penalties totalling Rs 1.52 crore and restrained the principal actors from the market for four years in all.[29]
Recent orders have also reached well beyond a single dealer. In January 2025, SEBI passed an interim order alleging an extended front running scheme built on the order flow of a very large foreign fund house. The scheme is alleged to have run for over two years with the involvement of overseas actors, and SEBI directed the impounding of the alleged unlawful gains.[30] Those allegations are yet to be decided. What the order shows is the shape of the investigation: front running examined as a coordinated scheme rather than isolated misconduct at a single desk.
7. From Individual Misconduct to Institutional Responsibility
The newest development shifts the focus from catching individuals to disciplining institutions. The SEBI (Stock Brokers) Regulations, 2026, notified on 7 January 2026, replaced the 1992 regulations in their entirety. They devote a full chapter, headed Institutional Mechanism for Prevention and Detection of Fraud or Market Abuse, to precisely this problem.[31] Regulation 21 sets the tone:
The stock broker shall put in place adequate systems for surveillance of trading activities and internal control systems to ensure compliance with all the regulatory requirements as may be specified for the detection, prevention and reporting of potential fraud or market abuse by its clients, directors, senior management, key managerial personnel, employees or authorised persons.[32]
The chapter then builds outward. It obliges the broker to prevent and detect fraud or market abuse, and to escalate and report what it finds. It requires a documented whistle blower policy, with a confidential channel and protection for those who use it, and it rests accountability on the broker’s own governance.[33] Around the chapter sit older duties restated in the new code. The broker must appoint a compliance officer who reports any non compliance to the stock exchange immediately and independently. It must keep the details of its clients confidential and must not misuse information about their investments. It must avoid conflicts of interest, never treating the client’s interest as inferior to its own.[34] And responsibility climbs the hierarchy. In the Maheshwari matter itself, two directors were held liable for the violations of their companies under Section 27 of the Act, as the persons who were in charge of and responsible for the conduct of the business.[35]
None of this closes the door to resolution. Settlement under the SEBI (Settlement Proceedings) Regulations, 2018 has been used in front running matters. In the Societe Generale matter, the conduit and several of his relatives settled on payment of monetary terms and disgorgement, together with a voluntary six month debarment.[36] Settlement, in other words, is a door, not an amnesty. The order in that matter says in terms that the settlement by one participant does not exonerate the others.[37]
Read together, these provisions convert what used to be good practice into enforceable regulation. What they do not do is specify the controls. Regulation 21 asks for systems that are adequate, and it leaves the content of adequacy to the broker in the first instance and to SEBI thereafter. The orders discussed earlier suggest where the pressure is likely to fall. Client order desks kept apart from employee trading. Live order information restricted to those who need it. Surveillance tuned to the reversal patterns that front running produces. Attention to accounts held by the relatives of employees. Retention of chat logs, order logs and device records. None of that is spelled out in Chapter IV, and none of it is an express requirement. But a broker whose systems address none of it will find it hard to call them adequate.
The change runs deeper than a longer list of duties. The PFUTP Regulations ask what a person did, and whether that conduct was fraudulent. Chapter IV asks a different question. It asks what the firm had in place, and whether its systems were capable of preventing the conduct, detecting it and reporting it. Those are separate enquiries, and the second does not depend on the first being answered against anyone in particular. How far that separation runs will be worked out as SEBI applies the new chapter. But the structure is clear enough. Front running has stopped being only a question about the person who placed the order.
8. Conclusion
Front running takes money from clients and from the market and hands it to people whose only contribution is access. It inflates the cost of every large investment and corrodes the trust on which delegated investing depends. The law’s answer has become steadily more complete. The statute prohibits the conduct and prices it through penalty, disgorgement and prosecution. Two separate developments closed the escape route that non-intermediaries once had. In 2017 the Supreme Court held that Regulations 3 and 4(1) reached them on the wording as it then stood. The 2018 amendment, in force from February 2019, then put the matter beyond argument by rewriting Regulation 4(2)(q) to speak of any person, and by extending it to underlying securities and derivatives. SEBI may prove its case on circumstantial evidence alone, judged on the preponderance of probabilities, and without direct proof of a guilty mind. The enforcement record of the past two years shows a regulator able to rebuild an entire scheme from electronic traces. Timestamps, tower data, a login from the wrong address, even a photograph of a currency note: all of it became evidence.
What remains is the institutional question, and the 2026 regulations answer it by making prevention a legal duty of the broker rather than an aspiration of its compliance manual. The firms that take this seriously will build those systems before SEBI comes looking. The ones that do not should read the recent orders carefully, because the trade before the client’s trade now leaves a trail, and the trail is being read.
Notes:
[1]Order in the Matter of Front Running of Trades of Big Client by Certain Entities of Chaturvedi Group, Order No. QJA/SS/IVD-2/ID19/32297/2025-26, para 7 (SEBI Mar. 27, 2026) [hereinafter Chaturvedi Group Order].
[2]Chaturvedi Group Order, supra note 1, para 79.
[3]Chaturvedi Group Order, supra note 1, para 72.
[4]Final Order in the Matter of Front Running by Ashok Maheshwari and Others, Order No. WTM/AS/ISD/ISD-SEC-6/32384/2026-27, paras 2(f) and 2(s) (SEBI Apr. 27, 2026), https://www.sebi.gov.in/enforcement/orders/apr-2026/final-order-in-the-matter-of-front-running-by-ashok-maheshwari-and-others_101128.html [hereinafter Ashok Maheshwari Order].
[5]SEBI (Prohibition of Insider Trading) Regulations, 2015, Regulation 2(1)(n) (India).
[6]Securities and Exchange Board of India Act, No. 15 of 1992, Section 12A (India) [hereinafter SEBI Act].
[7]Ashok Maheshwari Order, supra note 4, para 142; Chaturvedi Group Order, supra note 1, para 99.
[8]SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003, Regulations 3 and 4(1) (India) [hereinafter PFUTP Regulations].
[9]PFUTP Regulations, supra note 8, Regulation 4(2)(q), as substituted by the SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) (Amendment) Regulations, 2018, Notification No. SEBI/LAD-NRO/GN/2018/56 (Dec. 31, 2018), in force from Feb. 1, 2019.
[10]PFUTP Regulations, supra note 8, Explanation to Regulation 4(2).
[11]SEBI Act, supra note 6, Section 15HA (as substituted by the Securities Laws (Amendment) Act, 2014).
[12]SEBI Act, supra note 6, Explanation to Section 11B; Section 11(5).
[13]SEBI Act, supra note 6, Section 24(1).
[14]SEBI v. Kanaiyalal Baldevbhai Patel, (2017) 15 SCC 1 (India) [hereinafter Kanaiyalal].
[15]Kanaiyalal, supra note 14.
[16]Kanaiyalal, supra note 14.
[17]Kanaiyalal, supra note 14, para 53.
[18]Kanaiyalal, supra note 14, para 58.
[19]Chaturvedi Group Order, supra note 1, para 41.
[20]Chaturvedi Group Order, supra note 1, para 40.
[21]Chaturvedi Group Order, supra note 1, paras 1, 11 and 16(iii).
[22]Chaturvedi Group Order, supra note 1, paras 80 and 84.
[23]Chaturvedi Group Order, supra note 1, para 112.
[24]Chaturvedi Group Order, supra note 1, paras 103 and 104.
[25]Ashok Maheshwari Order, supra note 4, paras 1 and 2(a).
[26]Ashok Maheshwari Order, supra note 4, paras 2(f), 2(g), 2(s) and 53.
[27]Ashok Maheshwari Order, supra note 4, paras 2(k), 41 and 59.
[28]Ashok Maheshwari Order, supra note 4, paras 135 and 143.
[29]Ashok Maheshwari Order, supra note 4, paras 151.1, 151.4 and 151.5.
[30]Order in the Matter of Extended Front Running by Rohit Salgaocar, Ketan Parekh and Others, Order No. WTM/KV/ISD/ISD-SEC-7/31103/2024-25 (SEBI Jan. 2, 2025), https://www.sebi.gov.in/sebi_data/attachdocs/dec-2024/Front_Running_Order_Big_Client.pdf. The proceedings remain at the show cause stage and the allegations are yet to be finally adjudicated.
[31]SEBI (Stock Brokers) Regulations, 2026, Notification No. SEBI/LAD-NRO/GN/2026/291 (Jan. 7, 2026), Chapter IV (India) [hereinafter Stock Brokers Regulations, 2026]; Regulation 51(1) (repealing the SEBI (Stock Brokers) Regulations, 1992).
[32]Stock Brokers Regulations, 2026, supra note 30, Regulation 21.
[33]Stock Brokers Regulations, 2026, supra note 30, Regulations 23 to 26.
[34]Stock Brokers Regulations, 2026, supra note 30, Regulations 17, 18(4)(c), 37(d) and 38.
[35]SEBI Act, supra note 6, Section 27; Ashok Maheshwari Order, supra note 4, para 142.
[36]Chaturvedi Group Order, supra note 1, paras 103 and 104 and Table 31; SEBI (Settlement Proceedings) Regulations, 2018 (India).
[37]Chaturvedi Group Order, supra note 1, para 106.
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Author: Aaryan Pandit | 3rd year student at CNLU, Patna
