The curious case of definition and adjudication of front running in India

by Natasha Aggarwal, Amol Kulkarni and Bhavin Patel.

One of the core legislative mandates of the Securities and Exchange Board of India (SEBI) is to prohibit fraudulent and unfair trade practices (FUTP) relating to securities markets. A practice commonly classified as FUTP is front running. It is generally understood as a set of two trades or positions: first, a trade or position taken in advance of a large order, and second, a squaring off of the initial trade or position after the large order, to benefit from the price movement it causes.

SEBI issued the SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 (the PFUTP Regulations) to deter and sanction front running and other FUTPs.

Neither the SEBI Act nor the PFUTP Regulations define front running. SEBI has, however, defined it elsewhere: in guidelines, glossaries, master circulars and consultation papers, and in a number of adjudicatory orders.

In our working paper, Front running: The law and enforcement of an ill-defined violation, we set out the legal elements that a violation under the PFUTP Regulations requires: fraud, manipulation and unfair trade practice. These elements should inform any definition of front running. We find that the characteristics of front running laid down by SEBI in its other regulatory instruments and adjudicatory orders are inconsistent with these legal requirements.

Through an empirical study of 33 SEBI adjudicatory orders on front running between 2019 and 2024, we show that SEBI’s enforcement practice is also disconnected from the codified law, and does not engage with its key requirements.

This proliferation of inconsistent definitions and interpretations causes a range of problems:

• It creates confusion, and weakens the certainty and predictability of the law.
• It gives the regulator untrammelled discretion in deciding whether a violation has taken place.
• It raises concerns about separation of powers: the boundary between the regulator’s law-making and adjudicatory functions is erased and re-drawn erratically, at cost to the integrity of each function.

The result is a lack of doctrinal clarity about what front running means, and a set of conflicting articulations of the violation with no clear grounding in the codified law.

We suggest that the term be defined clearly, either in the parent statute or in the PFUTP Regulations. There is now a nearly three-decade history of enforcement, which should be enough to identify the ingredients of this violation.

The Securities Markets Code Bill, 2025 (the SMC) is an opportunity to write such a definition into the parent law. This would take the power to define the violation away from the regulator, restore the integrity of SEBI’s separate functions, and meet the requirements of separation of powers. In its present form, though, the SMC may fall short: we show the gaps and confusions that remain in its treatment of fraud, and its failure to define fraudulent or unfair trade practice, or front running, explicitly.

Part of the problem may lie in the absence of separation of powers within SEBI. The regulator can write subordinate legislation, investigate alleged violations, and adjudicate and sanction them, all without a strict separation between its quasi-legislative, investigative and adjudicatory arms.

This may incentivise SEBI to write broad, all-encompassing regulations in its quasi-legislative capacity, and then to widen their scope further to suit its quasi-judicial needs.

The regulator might defend this by pointing to the constantly changing methods used by fraudsters. International experience suggests otherwise: methods change, but the key constituents of securities fraud stay broadly constant.

In India, a lasting solution may require Parliament, not SEBI acting under its delegated powers, to define terms such as front running in the parent legislation.

Front running is only one example of an inconsistently defined and adjudicated practice within the broader category of FUTP. There are likely others. This points to the need for a wider review of how fraud, manipulation and unfair trade practice are defined and adjudicated under Indian securities law, with the aim of achieving consistency and certainty in interpretation and enforcement.

References

Front running: The law and enforcement of an ill-defined violation, TrustBridge working paper.

SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003, Securities and Exchange Board of India.

Securities Markets Code Bill, 2025, Bill No. 200 of 2025.

Natasha Aggarwal, Amol Kulkarni and Bhavin Patel are researchers at TrustBridge Rule of Law Foundation.

Source: https://blog.theleapjournal.org/2026/09/the-curious-case-of-definition-and.html