👍👍👍Wake-up call for insurers | The Financial Express

Clipped from: https://www.financialexpress.com/opinion/wake-up-call-for-insurers/3077421/

Sebi’s order on front-running shows why LIC must set up adequate processes to prevent such errant practices

The five entities barred were connected through family relations, common address and common phone number. (IE)

The Securities and Exchange Board of India’s (Sebi’s) decision to bar an employee of Life Insurance Corporation of India (LIC) and four related entities from the securities market and impound illegal gains of Rs 2.44 crore made by them is not an indictment of an errant trader alone. The interim order also raises a few red flags over the process followed by the insurance giant when dealing with clients’ investments. The casual approach of LIC in this regard is alarming; after all, it has Rs 41.02 trillion assets under management, which is one and a half times the AUM of the entire mutual fund industry. The irony is while stringent regulations on front-running exist for asset management companies following two high-profile cases, the insurance industry, which has large holdings in the equity segment, appears to be getting away by doing nothing. Front-running refers to an illegal practice in the stock market where an entity trades based on advanced information from a broker or analyst before the information has been made available to its clients. The way the LIC employee allegedly carried on with front-running is mindboggling.

The five entities barred were connected through family relations, common address and common phone number. In its order, Sebi found that Yogesh Garg, being a dealer in LIC, was in possession of non-public information regarding impending orders of LIC and acted as an information carrier. He also used the account of his late father to trade on the basis of such information. The brokers involved should explain how they allowed such large volume transactions to take place through an account held by a deceased person even though they were in possession of his death certificate.

Several questions emerge. One, Sebi’s order states that Garg is still professionally associated with LIC and has only been transferred from the investment department to another department. The kid- gloves treatment of an employee who is alleged to have used vital non-public information for his personal gains defies logic. Garg had access to information about upcoming equity transactions, even while he was working in the fixed income department. Sebi’s interim order notes he will be able to source such information unless immediate preventive directions are passed by LIC. Second, the front-running activities were detected by Sebi’s alert system, based on which an examination was conducted for the period January 2020 to March 2022 to examine possible violations of regulatory norms by the suspected entities. Insurance companies deal with large investments in equity markets and, therefore, there is no reason why they should not have an internal mechanism to deliver such alerts.

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Sebi’s interim order is absolutely right in suggesting to LIC that it should carry out detailed investigation to ascertain how Garg had access to non-public information of the equity segment while dealing in the debt segment before January 11, 2022, and whether any other individual was involved in passing the information to him. It prima facie appears LIC has no rule governing the activity in equity and fixed income dealing rooms. After all, Garg was placing intra-day orders to front-run LIC’s trades through the mobile phones belonging to his close relatives. Organisations such as LIC, which are critical to the securities market, are expected to have adequate processes to prevent fraudulent trade practices by its employees. On its part, the insurance regulator should also ensure that the investment process of insurance companies is tightened considerably.