Last week, SEBI’s whole-time member Ananth Narayan issued an interim order regarding a frontrunning case in LIC. Earlier frontrunning orders involved dealers in mutual funds such as Axis mutual fund or HDFC mutual fund. But this one involved an insurer and that too one which handles ₹41-lakh crore of public money. Besides, the associates of the main offender included his ma, saasu ma and his dead father.

For those who look down their noses on all things stock market, frontrunning involves getting access to sensitive unpublished information regarding upcoming stock market transactions of a large entity and then trading based on this information to make profit. Those indulging in frontrunning place a trading order, just before the entity does. This order is closed immediately after the stock price reacts to the large entity’s order.

Since information regarding stock market transactions of mutual funds and other pooled investment vehicles has been misused in the past, SEBI has tightened the rules to reduce such malpractices. But investments of insurance companies fall under IRDAI’s purview, not SEBI’s. The order indicates that checks within the investment process of insurance companies need to be tightened considerably.

The case, as explained in the order, is quite funny at one level. But it is also worrying because it shows that the country’s largest insurer, which accounts for 63 per cent of the life insurance market, is not taking its fiduciary responsibility and critical governance issues seriously enough.

Contours of the case

The issue came to light thanks to SEBI’s alert system which found five entities frontrunning trades of LIC. It found that Yogesh Garg, a bond dealer of LIC who became equity dealer from January 2022, was frontrunning the trades of LIC with the help of his mother, mother-in-law, a HUF in the name of his dead father and a HUF in the name of his mother. Yogesh Garg seems to have used the trading accounts of his close relatives to evade scrutiny.

The matter gets bizarre when it is seen that many of the transactions were routed through the trading accounts of Yogesh Garg’s father, Ved Prakash Garg, who died on March 23, 2019. Yogesh Garg also used the bank account of his late father, in which he was a joint account holder, to transfer and receive funds to brokers and to other associates.

Interestingly, when Yogesh Garg was frontrunning LIC’s equity trades between January 2020 and January 2022, he was not working in the equity investment department but in the bonds investments section. He worked as an equity market dealer between January and March 2022. Following SEBI’s alert and investigation, he was transferred to the Management Development Centre of LIC since April 11, 2022.

Questions that arise

This interim order raises some many questions.

One, do LIC and other insurance companies have rules governing activity in equity and fixed income dealing rooms? Investment funds governed by SEBI must adhere to strict rules to prevent leakage of information and to stop dealers from misusing information at their disposal. These rules include routing conversations of dealing teams only through dedicated telephone lines, with the conversations being recorded or through emails from authorised email ids. Mobile phones are not allowed inside the dealing room and access to internet is restricted. Entry to the room is also restricted to authorised employees only. All chat transcripts are tightly monitored and close watch is kept on all dealing room activity.

But given that Yogesh Garg was placing intraday orders to front run LIC’s trades through the mobile phones belonging to his close relatives, it appears as if LIC does not have any checks on its dealers or the activities within the dealing room.

Two, Yogesh Garg was not working as equity dealer prior to January 2022, but he was seen frontrunning LIC’s stock market transactions even while he was working as a bond dealer. This shows serious lapses in the manner in which investment decisions are passed down the line. The SEBI order states that in LIC, there are different committees that select the stocks which should be bought or sold, the quantity and the price limit. It’s the job of the fund managers and chief officers of LIC to prepare a daily list for buying and selling and communicate this to the dealers. This system appears too porous with too many people involved with the final decision-making. Also, the manner in which the day’s orders are communicated do not seem watertight.

Someone in the equity dealing room or someone involved in equity decision-making appears to have been communicating the day’s transaction details to Yogesh Garg. It’s not clear if LIC is investigating these leaks and whether it has taken steps to plug them. Is such information kept confidential or freely discussed among employees?

Three, why is LIC handling Yogesh Garg with kid’s gloves? The only action taken against him appears to be to transfer him to another department. But as the order points out, Yogesh Garg can still access price-sensitive information since he continues to be an employee of LIC, and misuse it.

Four, how did the brokers named in the order, Anand Rathi and Motilal Oswal, allow the trading account of a deceased client to be used for more than two years? Were they aware that the son was operating the account? Should the trading members not have sounded the alarm regarding large orders being executed through such an account?

Five, when personnel working in the investment departments are asked to disclose the investments in their name and their family members’ names, the disclosure stops with holdings in the names of spouse and children. This order however shows that the definition of relatives needs to be expanded to all dependents and members of the extended family who are close to the employee, as well.

Better checks please

SEBI has barred Garg and his associates from the capital market and impounded the profit of over ₹2 crore made by them through these transaction. But it is hoped that this order has a wider impact of tightening the investment process within LIC and other insurance companies which deal with copious amount of investor funds. Laissez faire in investment departments in these funds neither helps the investors nor the insurance industry.

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