Sebi issues fresh notice to HDFC Mutual Fund

Sebi issues fresh notice to HDFC Mutual Fund

MUMBAI: The Securities and Exchange Board of India (Sebi) has issued a fresh show-cause notice to HDFC Mutual Fund, the country's largest asset management company, alleging front-running by a former employee.

Four years ago, the capital markets regulator had banned HDFC Mutual's equities dealer Nilesh Kapadia from trading in the stock market after preliminary investigation revealed he had leaked information about the fund's trades to three market participants in advance. In the subsequent investigations, Sebi found Kapadia was involved in other instances of front-running, according to a top regulatory source. "The legal notice has been sent after Sebi observed several instances of violations," a regulatory official said. A show-cause notice is not an indictment; it seeks to know from the asset management company why penal action should not be taken against it for violating securities laws and for not maintaining high integrity in its business dealings.

In response to an e-mail query, an HDFC Mutual Fund spokesperson said, "This issue relates to the same alleged misconduct of the same dealer, Nilesh Kapadia, who is no longer with the organization since June 2010. We are in the process of resolving the issues with the regulator in accordance with Sebi rules." Sebi alleged in its recent notice that HDFC Mutual Fund and the trustees failed to comply with its rules. The regulator has said the trustees and the chief executive officer (CEO) of mutual funds should ensure all rules are complied with. Front-running involves buying or selling shares by employees of asset management companies or brokers before executing orders for the funds or clients. It allows the front-runner to ride on the price movement which comes about as a result of the larger order. In this case, Kapadia passed on information ahead of the fund house's transactions. The fund house has the option of resolving the issue again with the regulator through the consent order mechanism.