Last week, the Bombay High Court issued a notice to the central bureau of investigation (CBI) regarding a plea to transfer the investigation of a high-profile mutual fund scam. The case involves Viresh Joshi, former chief trader and fund manager at Axis Mutual Fund, and others accused of multi-crore front-running fraud. The plea, filed by investor Soni Parmar, seeking transfer of the investigation to CBI from the economic offences wing (EOW) of Mumbai police, alleges that Mr Joshi and his accomplices exploited confidential information to manipulate stock trades. Various media reports highlight that investigators estimate that the front-running activities, facilitated by the misuse of insider information, caused financial harm amounting to Rs2.50 lakh crore over 6.6mn (million) investors.
Front-running refers to an illegal trading practice where brokers or dealers trade securities based on non-public information about large impending orders. This unethical activity allows individuals to profit from subsequent market movements, often at the expense of other investors. The Axis MF case underscores the critical need for stricter regulatory oversight to protect investor trust. Mr Joshi allegedly used encrypted communication channels, such as WhatsApp, to share confidential information about Axis Mutual Fund's trading strategies with brokers, enabling them to manipulate stock prices for personal gain.
The directorate of enforcement (ED) recently uncovered two London properties and significant foreign investments linked to Mr Joshi. Documents show Rs14 crore remitted abroad to incorporate Vintage Capital Investment LLC in Dubai and Vincent Capital Holding Limited in the UK. During searches under the Foreign Exchange Management Act (FEMA), the ED seized foreign currencies worth Rs13 lakh and documents exposing the misuse of funds. Investigators also revealed substantial wealth amassed by Joshi, including real estate worth Rs150 crore in Mumbai, properties in London, and fixed deposits worth Rs54 crore. The case highlights severe regulatory lapses in safeguarding investors.
Investigators allege that Mr Joshi used insider information to collaborate with brokers in Dubai for kickbacks. The profits were routed back into India through shell entities, ultimately providing unsecured loans to Mr Joshi and his associates. The ED's probe builds on SEBI's interim findings which identified wrongful gains of Rs30.56 crore.
Earlier in March 2023, market regulator Securities and Exchange Board of India (SEBI) has barred 21, including Mr Joshi till further notice. SEBI also impounded Rs30.55 crore, the wrongful gains earned from the prima facie front-running activities, while directing these 21 entities to deposit the money in an escrow account.
"I find that the way Mr Joshi has conducted himself as a dealer of Axis MF in conceiving a fraudulent scheme and executing the said scheme so meticulously over a sustained period in collusion with other unscrupulous entities to front run the trades of his very own mutual fund where about 66 lakh unit holders have put an aggregate sum of assets under management (AUM) of Rs2.52 lakh crore (as of 31 March 2022), it smacks of rampant dishonesty and unfairness on the part of Mr Joshi and his accomplices,"
SK Mohanty, whole-time member (WTM) of SEBI, says in an order at that time.
The surveillance system in SEBI generated specific alerts indicating that trades by certain suspected entities executed from 1 September 2021 to 31 March 2022 appeared to have been not executed in the ordinary course of trading and were apparently in the nature of trades that were executed for front-running the trades of Axis MF.
SEBI initiated multiple investigations against entities and the trading members suspected in the front-running. It also conducted search and seizure operations.
SEBI's investigation revealed that 25 trading members through which Axis MF placed its orders were diversified. "The fact that there were numerous trading members through which Axis MF was placing its orders, it was suspected that the leakage of information about the impending orders of Axis MF was possibly done at the end of Axis MF."
"During the course of the investigation, it was noted that noticees connected to Mr Joshi, the then chief dealer of Axis MF, were observed to have traded in different securities ahead of the impending orders placed on behalf of Axis MF. Subsequently, soon after Axis MF's orders were placed, these connected noticees squared off their earlier trade positions taken on the exchange platform. In the process, substantial proceeds of profit were generated in the trading accounts of these connected noticees, by placing orders ahead of and in anticipation of the price movement of scrips in a certain direction on account of the impending large buy or sell orders of Axis MF."
"The trades that were executed to front run the trades of Axis MF in the aforesaid manner from the trading accounts of the connected noticees were done in a similar manner on numerous occasions during the investigation period," SEBI's investigation revealed.
According to SEBI, trading accounts used for the front-running were arranged by Sumit Desai, a market operator at the behest of Mr Joshi. Mr Desai also introduced Dubai-based Prijesh Kurani to Mr Joshi. Mr Kurani was entrusted with the task of placing orders for front-running the trades of Axis MF in the trading accounts to connected noticees, arranged by Mr Desai, under instruction from Mr Joshi, it added.
"...on a preponderance of probability basis, it can be prima facie, strongly inferred that Mr Joshi had passed on or leaked the confidential non-public information regarding the impending orders of the big client (Axis MF) to individuals other than for whom the said information was intended for, i.e., other than the empanelled stock brokers of Axis MF," SEBI says.
Despite these revelations, SEBI clarified that the operations of Axis Mutual Fund as an institution remain unaffected.
In 2022, multiple agencies intensified their investigations into Mr Joshi's activities. The income-tax (I-T) department conducted raids across Mumbai, Ahmedabad, Vadodara, Bhuj, and Kolkata, unearthing unaccounted deposits exceeding Rs55 crore. Over 20 lockers linked to Mr Joshi were frozen. The ED's parallel investigation revealed Mr Joshi's methods of transferring illicit gains abroad, while SEBI barred him and 20 associates from accessing capital markets.
The Axis Mutual Fund front-running scandal has exposed systemic vulnerabilities in India's financial markets. With investigations continuing across multiple agencies, including SEBI, ED, and the I-T department, the case serves as a stark reminder of the importance of stringent market regulations and transparent practices to safeguard the interests of investors.
