MUMBAI: Market regulator Sebi has detected a case of insider trading in HDFC Mutual Fund that led to an estimated loss of nearly Rs 2.4 crore for the fund house's investors. The regulator has banned four people, Nilesh Kapadia, one of HDFC MF's equity dealers, and three of his associates conduits outside of the fund house — Rajiv Ramniklal Sanghvi, Chandrakant P Mehta and Dipti Paras Mehta — who had indulged in 'front running' on information provided by Kapadia for personal gains.
In addition to the ban, Sebi has also ordered recovery of the loss incurred by the investors from these people, and also from HDFC MF. Besides, the regulator has also ordered an internal enquiry by the fund house. Spokespersons from the fund house were not available for comment.
In a 12-page order posted on its website late in the evening, complete with transcript of one of the conversations between Kapadia and Sanghvi, Sebi pointed out 38 instances of insider trading and front running involving these four entities.
Front running is an illegal market practice where people, usually armed with insider information, trade on stocks ahead of trades done by large institutions. As in the present case, Sanghvi and the Mehtas obtained prior information from Kapadia and which stocks the fund was going to buy. These three then bought those particular stocks ahead of Kapadia and made substantial profit when the fund house actually executed the buy orders and prices of those stocks went up.
The Sebi order estimated that while Sanghvi made a profit of Rs 1.07 crore, the Mehtas together made a profit of Rs 91 lakh. The case relates to insider trades between April and July, 2007. Acting on suspected references of insider trading from BSE and NSE, Sebi had instituted investigations and unearthed the scam.
"Though Nilesh Kapadia and Rajiv Ramniklal Sanghvi had initially claimed in their statement to Sebi during the investigation that they did not know each other, the investigations unearthed evidence of their regular conversations over telephone during the relevant period," the Sebi order noted.
The market regulator’s order also said that it was "imperative to identify if there were other instances by Kapadia, as he is the equities dealer of HDFC MF since June 2000 till date."
Sebi feels his continuation as a dealer for the fund house posed a threat to HDFC MF's unitholders and its portfolio management clients and "appears to be undesirable as such transgressions in the institutions managing public funds cannot be looked at indulgently as it would dent public confidence reposed in such institutions and cause damage to the securities market as a whole."
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