HDFC AMC gets another Sebi rap for front-running

The Securities and Exchange Board of India (Sebi) has sent another showcause notice to HDFC Asset Management Company for 109 cases of front-running by a former employee — Nilesh Kapadia — of the fund house. In June 2010, the market regulator had found similar cases of fund-running by Kapadia.

In a letter sent to the fund house on March 20 this year, the regulator had said: “The half-yearly report given by HDFC Trustee Company for the period ended March 2007 and September 2007, said ‘the trustees certify they are satisfied and that there have been no instances of self-dealing or front-running by any of the directors of the trustee company. However, 109 instances have been observed where, HDFC dealer Nilesh Kapadia had passed information/instruction to front-run HDFC trades.”

The letter goes on the say HDFC AMC is responsible for the acts of commission or omission by its employees whose services it has availed of. “Further, it is alleged Milind Barve, CEO of HDFC AMC, did not ensure the company complied with all provisions of these regulations and the guidelines or circulars issued in relation thereto from time to time,” said the letter.

When contacted, a spokesperson for HDFC AMC said: “This issue relates to the same alleged misconduct of the same dealer, Nilesh Kapadia, who is no longer with the organisation since June 2010. We are in the process of resolving the issues with the regulator in accordance with Sebi rules.”

In June 2010, Sebi had identified Kapadia as the one who leaked information about some stock market deals by the fund. Its probe revealed 38 instances over 24 trading days between April and July 2007 when three investors — Rajiv Sanghvi, Chandrakant Mehta and Dipti Mehta — bought or sold shares before HDFC MF’s trades were executed. The front-running had resulted in a loss of Rs 2 crore to HDFC MF unit holders.

In October 2011, Barve and HDFC Trustee Company had settled earlier front-running charges with the market regulator by paying Rs 55 lakh. HDFC MF and HDFC Trustee Company paid Rs 20 lakh each to the regulator, while Barve paid Rs 15 lakh to settle the charges through a consent-order mechanism. Consent order is an order settling administrative or civil proceedings between the regulator and an entity that may prima facie be found to have violated securities laws.

In the past, L&T Investment Management had faced front-running charges. But the decision to drop proceedings was taken, as DBS Cholamandalam Asset Management, which was taken over by L&T Investment management, said in an application that it was willing to pay Rs 10 lakh as settlement charges. The market regulator had also investigated Tata Mutual Fund but there were no adverse findings.