Sebi bars Kapadia from markets in HDFC MF front-running case

Sebi also barred three others from the markets and ordered return of over Rs 1.75 crore worth illegal gains

Closing a seven-year-old front running case at HDFC Mutual Fund, 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.

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.