SEBI fines Pace Stock Broking in Axis Mutual Fund front-running case

The Securities and Exchange Board of India (SEBI) has imposed a monetary penalty of ₹4 lakh on Pace Stock Broking Services for regulatory lapses identified during its investigation into the alleged front-running of Axis Mutual Fund trades by certain clients of the brokerage.

The investigation covered the period from April 1, 2020, to March 31, 2022, during which SEBI examined trades executed through Pace Stock Broking that were suspected of front-running those of Axis Mutual Fund. Based on its findings, the market regulator initiated adjudication proceedings against the brokerage for alleged violations of the SEBI (Stock Brokers) Regulations, the Code of Conduct for Stock Brokers, provisions of the SEBI Act, and various NSE circulars.

According to the adjudication order, one of the key allegations was that Pace Stock Broking failed to maintain and furnish trade-wise IP address records in the manner prescribed under SEBI's November 6, 2013 circular governing algorithmic trading. While the brokerage claimed to have maintained IP address records, it was unable to provide the corresponding IP addresses mapped to specific user IDs, dealers or traders in 93 instances during the investigation. SEBI held that this amounted to non-compliance with the prescribed record-keeping requirements.

The order also examined the role of Kaleeswaran Pandian. SEBI observed that terminal IDs and user IDs had been allotted in his name between September 14, 2015, and April 27, 2022, despite him not being a dealer or an approved person of the brokerage during the investigation period. The regulator alleged that his credentials, including his KYC details and NISM certification, were used to obtain trading terminal IDs and user IDs from the National Stock Exchange (NSE) for Pace's Chennai and Ghaziabad branches.

Pace Stock Broking argued that the mapping of Mr Pandian's details to a CTCL ID was an inadvertent clerical or copy-and-paste error and that the terminal was actually operated by Rajeev Ranjan. However, SEBI rejected this explanation, observing that the relevant terminal IDs and user IDs had not only been allotted in Mr Pandian's name but had also been renewed and updated over several years, making the explanation of a one-time clerical error untenable.

SEBI also held that the brokerage submitted incorrect information regarding Mr Ranjan, whom Pace had identified as the dealer operating a particular user ID during the investigation period. The regulator concluded that the brokerage had failed to maintain accurate and updated records relating to user IDs, terminal IDs and approved dealers, in violation of applicable NSE circulars and regulatory requirements.

In its defence, Pace Stock Broking maintained that the alleged lapses were procedural in nature, denied any deliberate misrepresentation, and said it had taken corrective measures to strengthen its internal controls and record-keeping processes. The brokerage also argued that it had not derived any unfair gain and that no investor losses had been established.

After considering the submissions, SEBI held that the brokerage had violated the applicable SEBI circular, the SEBI (Stock Brokers) Regulations, the Code of Conduct for Stock Brokers, relevant NSE circulars, and Section 11C(3) of the SEBI Act. The adjudicating officer imposed penalties of ₹1 lakh under Section 15A(a), ₹1 lakh under Section 15A(b), and ₹2 lakh under Section 15HB of the SEBI Act, taking the total penalty to ₹4 lakh, and directed the brokerage to pay the amount within 45 days of receiving the order.