A show-cause notice has been issued by Sebi to HDFC Asset Management Company 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 has asked these entities to explain why penal action should not be taken against them for failing to comply with the relevant regulations, sources said.
When contacted, the fund house said it is in the process of resolving the issues with Sebi and the concerned dealer, whose alleged misconduct was at the core of the case, was no longer with the organisation.
"This issue relates to the same alleged misconduct of the same dealer, Nilesh Kapadia who is no longer with the organisation since June 2010. We are in the process of resolving the issues with the regulator in accordance with SEBI rules," an HDFC AMC spokesperson told PTI.
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 Mutual Fund (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 three individuals Rajiv Ramniklal Sanghvi, Chandrakant P Mehta and Dipti Paras Mehta -- 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 Nilesh Kapadia, then Assistant Vice President (Equities), was its equities dealer since June 2000.
The investigation also revealed that Kapadia was tipping off and advising Rajiv Sanghvi (also his college mate) to trade ahead of the orders of HDFC AMC and had helped him make substantial gains in the process.
As per Sebi's interim order of June 2010, the three individuals made substantial intra day profits by front running the orders of HDFC AMC in a total of 38 instances between April to July 2007.
Later, HDFC AMC informed Sebi about more instances of suspected front-running, including about another individual having "front run HDFC trades on 62 transactions", while as many as 109 instances were observed where Kapadia could have passed information or instruction to front-run HDFC trades.
Kapadia and Sanghvi initially claimed before Sebi that they did not know each other, but investigations unearthed "evidence of their regular conversations over telephone during the relevant period (April to July, 2007) when the instances of front-running identified by BSE and NSE, had taken place.
Evidence collected in the form of telephonic call records and the transcript of their conversations showed 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 Chandrakant Mehta and his daughter-in-law Dipti were also operated on the basis of tips received by Sanghvi from Kapadia.
The regulator's interim order in June 2010 further 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 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.
The regulator also asked Kapadia and HDFC AMC to jointly deposit the estimated losses to the trustees of HDFC Mutual Fund, while Kapadia and the three individuals were barred from dealings in securities markets.
More than a year after Sebi's interim order, HDFC MF and its CEO Milind Barve 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 towardssettlementcharges.
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.
While Kapadia was removed from service, an internal inquiry was conducted by trustees of HDFC AMC, as directed by Sebi in their interim order of June 17, 2010.
An investigation committee was also set up and a final report was submitted to Sebi, while a plan to overhaul the internal controls and internal preventive measures were also put in place, as per the regulator's orders.