Mumbai: Closing a seven-year-old front running case at HDFC Mutual Fund, capital market regulator Securities and Exchange Board of India (Sebi) has barred former equity dealer Nilesh Kapadia and three others from the markets and ordered return of over Rs 1.75 crore worth illegal gains.
Mr Kapadia, who had to quit the top fund house after the front-running case of 2007 came to the light, and three individuals who were trading on the basis of his tip-offs - Rajiv Ramniklal Sanghvi, Chandrakant P Mehta and Dipti Paras Mehta - have been barred from the markets for 10 years.
In its 59-page order, Sebi said that the 10-year restraint period for them would be calculated after taking into account the restraint already undergone by him vide an interim order dated June 17, 2010. For the three others, who were not directly linked with HDFC Mutual Fund but were found to be 'associated persons' with Mr Kapadia in terms of their market dealings, the restrain order would increase by further five years if they fail to deposit the disgorgement amount within 45 days.
The matter relates to trades conducted in 2007 and Sebi had begun its probe after receiving two separate references from the BSE and NSE on suspected instances of front-running of the orders of HDFC MF.
Front-running refers to an unethical practice of someone trading in shares on the basis of advance information given by a broker, analyst or other executive at a market intermediary before the trades are conducted by that entity.
This practice increases the cost of acquisition of shares or reduces the realisation from the sale of shares for the concerned fund house or other market intermediary, thus adversely affecting the interest of common investors. In this case, the exchanges found "certain coincidence" between trading pattern of the three individuals with that of HDFC AMC.
On further probe, Sebi found that trade orders of HDFC AMC were getting executed through a common dealing desk within the AMC and Mr Kapadia, then assistant vice president (equities), was its equities dealer since June 2000. He quit HDFC MF in June 2010, the same month when an interim order was passed by Sebi in this case.
Taking forward this case, Sebi issued a show-cause notice earlier this month to the fund house and other entities for alleged violations of regulations and code of conduct governing mutual funds, brokerage firms and portfolio management, among others.
In the notice, Sebi had asked these entities to explain why penal action should not be taken against them for failing to comply with the relevant regulations.
The investigation had also revealed that Mr Kapadia was tipping off and advising Sanghvi (also his college mate) to trade ahead of the orders of HDFC AMC and had helped him make substantial gains in the process.
While passing the latest order, the regulator said that "the same shall not prejudice the right of Sebi from taking other appropriate action as may be warranted including an action for recovery of the amounts ordered to be disgorged from the concerned noticees".
As per the order, Mr Sanghvi has been asked to pay Rs 1.13 crore as disgorgement amount and applicable interest, while the corresponding amounts for Chandrakant Mehta and Dipti Mehta are Rs 22.66 lakh and Rs 41.33 lakh, respectively.
Sebi said that the three noticees are liable to pay interest at the rate of 12 per cent simple interest per annum from the dates of trade (in 2007) till July 2014.
They have been asked to make the payments within 45 days, while Sebi also asked NSE to transfer the money already deposited by the three as per the interim order of June 17, 2010, retained in the escrow account, along with all additions such as interest accrued, within ten days to Sebi.
As per Sebi's interim order of June 2010, the three individuals had made substantial intra-day profits by front running the orders of HDFC AMC between April to July 2007.
Mr Kapadia and MR Sanghvi initially claimed before Sebi that they did not know each other, but investigations unearthed evidences, including telephonic call records and the transcript of their conversations, showing that Mr Kapadia was tipping off Mr Sanghvi before placing the orders for HDFC AMC and Mr Sanghvi was trading on the basis of the same.
Mr Sanghvi was also reporting back to Mr Kapadia on the trade quantity executed by him, along with price details. After being confronted with the documents, both admitted to their wrongdoing "in their recorded statements under oath before the Investigating Authority".
Sebi also found that trading accounts of Mehta and his daughter-in-law Dipti were also operated as per these tips.
Sebi had said that "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".
Consequently, Sebi had ordered that HDFC AMC "shall not utilise the services of Nilesh Kapadia for the trading activities done on behalf of HDFC AMC" and institute an internal inquiry to be conducted by trustees of HDFC MF.
More than a year after Sebi's interim order, HDFC MF and its CEO Milind Barve had reached a consent settlement with the markets regulator in October 2011 after payment of Rs 55 lakh for settling the proceedings.
While HDFC AMC and HDFC Trustee Co Ltd paid Rs 20 lakh each, Mr Barve paid Rs 15 lakh towards settlement charges.
Another consent settlement was reached in September 2012 between Sebi and an individual, Sanjay Sanghvi, in this HDFC front running case after payment of Rs 15 lakh and a voluntary three-year debarment from securities markets.