How A $2.6 Trillion Fund Was Taken For A Ride

A recent investigation by India’s market regulator, the Securities and Exchange Board of India (SEBI), has unveiled a disturbing case of market manipulation that involved a massive global fund—Capital Group. The Los Angeles-based investment manager, which oversees a portfolio worth $2.6 trillion in global equity stakes, confirmed it had fallen victim to an elaborate scheme that siphoned off millions of dollars in illegal profits.

The Scheme: How Capital Group Was Targeted

The scheme targeted Capital Group by exploiting sensitive trade information. Capital had enlisted the help of Rohit Salgaocar, a Singapore-based intermediary, to facilitate trades in India, where liquidity for large deals could be a challenge. Salgaocar allegedly leaked information about Capital’s trades, including pricing and quantities, to a network of insiders.

These insiders, including a trader named Parekh, would capitalize on this inside information by buying or selling shares in advance of Capital’s orders. For example, they would purchase shares right before Capital’s buy orders hit the market, only to sell them back to the fund at a profit. Similarly, when Capital was selling shares, they would short the stocks and buy them back at a lower price.

The Key Players: Parekh, Salgaocar, and the Leaked Information

At the center of the scandal is Parekh, who was previously banned from the Indian markets for his role in one of the most notorious financial scams in the early 2000s. SEBI has now banned Parekh once again and ordered him, along with others involved, to return 658 million rupees ($7.8 million) in illicit profits.

The investigation also revealed a significant trail of communications between Parekh and Salgaocar, primarily via WhatsApp, where they exchanged crucial trade information. SEBI’s report, supported by testimonies and evidence, suggests that Parekh and his associates profited from information that was supposed to remain confidential between Salgaocar and Capital Group.

SEBI’s Action and the Market’s Fragility

As a result of these findings, SEBI has barred Parekh, Salgaocar, and several other individuals from trading in the Indian market. They are also required to return their illegal gains. However, the two brokerages that handled Capital’s trades are not under investigation, as they had commission-sharing agreements with Salgaocar, not directly with Capital.

Capital Group, for its part, confirmed that it had no knowledge of the misuse of its trading information. The fund and its traders are not being investigated for any wrongdoing.

Why This Matters: Systemic Issues in India’s Equity Market

This case raises larger concerns about the integrity of India’s equity markets. The market structure in India is known to have some weaknesses—particularly when it comes to handling large orders. Unlike other global markets, where large trades can be negotiated discreetly, India’s main market screen is often flooded with substantial orders that leak in advance, creating opportunities for insiders to take advantage of this information.

The use of public leaks in Indian markets is notorious, with industry insiders even referring to large funds using cryptic terms. For example, BlackRock is often referred to as “Kala Pathar” or “Black Rock,” and Life Insurance Corporation of India is known as “Big Daddy.” These leaks give traders an edge, but they also put large investors at a disadvantage, as their orders are already public knowledge.

A Call for Action: Fixing Information Leaks and Preventing Front-Running

While SEBI’s investigation has uncovered a wealth of evidence, including screenshots and testimonies, the scale of such investigations cannot be replicated for every market breach. A more systemic solution is needed to address the root causes of information leaks and to combat front-running more effectively.

India must urgently improve its market infrastructure and consider solutions like dark pools, which allow large trades to be matched without exposing sensitive details. If left unchecked, this type of market manipulation will continue to undermine investor confidence, particularly for global investors.

The Need for Market Reform

India’s market regulator, SEBI, has taken a strong stance in this case, but there is a need for broader reforms to protect large investors from market manipulation. By tightening regulations, enhancing market transparency, and implementing measures to curb information leaks, India can restore trust and ensure that front-running remains a bug, not a feature, of its equity market.

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