MUMBAI: The Securities and Exchange Board of India (SEBI) has banned an equities dealer of HDFC Asset Management from stock market transactions for allegedly leaking information of its trades to three market participants in advance.
The trio, too, have been barred from stock market transactions until further notice. In its order late Thursday, the market regulator revealed instances where investors Rajiv Ramniklal Sanghvi, Chandrakant P Mehta and Dipti Paras Mehta placed orders in the same set of stocks, just before those were traded by dealer Nilesh Kapadia on HDFC AMC’s behalf.
This practice, known as front-running, involves buying or selling of shares by employees working for investment funds or brokers before executing orders for the fund or clients.
Often these employees act in concert with market operators, who have the financial muscle to take up huge positions, and derive maximum benefit from the information. If the client is a mutual fund, unitholders lose out as front-unning increases the cost of share purchases or reduces the realisations from share sale.
SEBI’s investigation revealed 38 instances over 24 trading days between April and July 2007, when the three investors bought or sold shares before HDFC AMC’s trades were executed, the order said. The three investors made combined profits of about Rs 2 crore during the period, it said.
“The interests of numerous unitholders of HDFC Mutual Fund and portfolio management clients of HDFC AMC have been compromised due to such front-running orchestrated by none other than the dealer of HDFC AMC,” the order said. SEBI has directed HDFC AMC and the dealer to jointly deposit the estimated losses identified so far to mutual fund’s trustees.
“In the instances under investigation, initially when the front-runner/s were building up their positions, they were also trying to attain their own volume targets, in the process taking away the liquidity that would have gone to MF, as Nilesh Kapadia had tipped off Rajiv Ramniklal Sanghvi instead of placing orders for HDFC AMC with the stock broker,” the order said.
Further, the market regulator has asked HDFC Mutual Fund Trustees to set up a committee to examine all transactions by Mr Kapadia, in his position as the dealer of HDFC Asset Management.
“The Trustees of HDFC Mutual Fund shall, within a period of one month from the date of this order, submit a plan to overhaul the internal control systems and the internal preventive measures of HDFC Asset Management Co, to avoid such instances in the future,” the order said.