Non-intermediary front running under PFUTP rules requires a specific prohibition; advance knowledge alone did not establish market fraud.

Front running by a non-intermediary was examined under the 2003 PFUTP Regulations and section 15HA of the SEBI Act. Regulation 3 prohibits fraudulent and unfair trade practices, but regulation 4(2)(q) specifically treats front running as fraudulent only when committed by an intermediary. The commentary notes that the broader language in the 1995 regime was not carried forward into the 2003 framework. On the stated facts, the trades were screen-based and executed at prevailing market prices, and dishonest conduct towards an employer did not by itself amount to market fraud or manipulation absent a specific prohibition covering non-intermediary front running.

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Issues: Whether front running by a person who is not an intermediary, based on advance information of a client's impending trades, falls within regulation 3 of the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Markets) Regulations, 2003, and can sustain penalty under section 15HA of the Securities and Exchange Board of India Act, 1992.

Analysis: Regulation 3 of the 2003 Regulations prohibits fraudulent and unfair trade practices, while regulation 4(2)(q) specifically treats front running as fraudulent only when done by an intermediary. The earlier 1995 Regulations contained a broader prohibition applicable to any person, but that breadth was not carried forward in the 2003 regime. On the facts, the trades were screen-based and executed at prevailing market prices, and the alleged conduct, though dishonest as against the employer, did not amount to market fraud or manipulation in the absence of a specific provision bringing such non-intermediary front running within the regulatory prohibition.

Conclusion: The non-intermediary appellants could not be held guilty of violating regulation 3 of the 2003 Regulations on the basis alleged, and the penalty order was unsustainable.

Final Conclusion: The appeals succeeded and the impugned adjudication orders were set aside.

Ratio Decidendi: In the absence of a specific prohibition, front running by a non-intermediary is not punishable as a fraudulent or unfair trade practice under the 2003 Regulations merely because it involves advance knowledge of a client's trades.

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