The Securities and Exchange Board of India (SEBI) has banned an equities trader, Assistant Vice President Nilesh Kapadia of HDFC Mutual Fund from conducting stock market transactions for revealing advanced information of the fund's trading to three market participants. Those three have also been banned from the markets. In an order late on 19th June, SEBI gave a detailed account of instances where Rajiv Ramniklal Sanghvi, Chandrakant P Mehta and Dipti Paras Mehta placed orders in the same set of stocks, just before those were traded by Kapadia on the fund company's behalf.
This practice is known as front-running and consists of buying or selling of shares by employees working for investment funds or brokers before executing orders for his employer. Apart from the ban, SEBI has also ordered recovery of the loss incurred by the investors from these people, and also from HDFC Mutual Fund. The regulator has also ordered an internal enquiry by the fund house.
SEBI's order is based on a detailed investigation of a particular period in April to July 2007. SEBI's investigators have estimated that during this period, Kapadia's actions have caused a loss of Rs 2.38 crore to HDFC Mutual Fund's unit-holders. However, the order notes that Kapadia has been an equities dealer for more than a decade while the detailed investigations pertain only to a three month period.
As per the law, fund houses are responsible for acts of commission and omission by its employees. Accordingly, SEBI has asked Kapadia and HDFC to jointly deposit the loss amount.
Speaking to Value Research, HDFC Mutual Fund CEO Milind Barve said that the AMC would not be contesting SEBI's charges and that what had happened was a breach of trust by an employee. He also said that HDFC would immediately deposit the entire fine amount.
For the period under investigation the fraud was detected in Reliance Industries, ICICI Bank, ICRA, Zee Entertainment, Century Textiles, Dish TV, HT Media, Tata Elxsi, United Phos, Zee News, Amtek Auto, Birla 3M, TVToday, and some others.