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, the capital markets regulator 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 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 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 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, 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.
Kapadia and 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 Kapadia was tipping off Sanghvi before placing the orders for HDFC AMC and Sanghvi was trading on the basis of the same.
Sanghvi was also reporting back to Kapadia on the trade quantity executed by him, along with price details. After being confronted with the documents, Kapadia and Sanghvi 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, 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.
According to Sebi, Sanghvi, Chandrakant and Dipti Mehta have made gains by their trading activities on the tips given by Kapadia, which is found to be in contravention of the provisions of the Prohibition of Fraudulent and Unfair Trade Practices (PFUTP) Regulations.
Consequently, the regulator has restrained Kapadia, Chandrakant Mehta and Dipti Mehta "from accessing the securities market and are further prohibited from buying, selling or otherwise dealing in securities, for a period of 10 years."
The period of such restraint already undergone by them vide the interim order dated June 17, 2010 shall be taken into consideration while computing the above directed period of restraint," it added.
The three individuals have been ordered to return of over Rs 1.75 crore worth illegal gains within 45 days.
Sebi said that in case, the "directions for disgorgement and payment of interest is not complied within the stipulated time, Sanghvi, Chandrakant Mehta and Dipti Mehta shall be restrained from accessing or buying, selling or otherwise dealing in the securities market, for a further period of 5 years."