HDFC MF to compensate Rs 7 cr for front-running losses

HDFC Mutual Fund will pay around Rs 7 crore to the investors affected by nearly nine-year old front-running case at the fund house.
The firm has already begun compensating those investors who had suffered losses due to the manipulative activity of its then equities dealer Nilesh Kapadia.
While the dealer was later terminated from service, the fund house had also reached a consent settlement in the matter with the regulatory authority in 2012.
Now, as advised by Sebi (Securities and Exchange Board of India), HDFC Mutual Fund has begun compensating the affected unit holders for the total amount of losses in their accounts due to the front-running activity.

This case relates to trades conducted in 2007, wherein Kapadia and others were involved in front-running at 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 emails sent to the concerned investors, HDFC Mutual Fund said Sebi in its probe had identified certain instances of front-running by a former equities dealer of HDFC Asset Management Company Ltd with certain set of front-runners.

HDFC AMC has since terminated the services of the said equities dealer, it said.
"As per the consent terms filed by HDFC AMC with Sebi in the matter and as now advised by Sebi, the total amount of losses, as determined by Sebi, are to be compensated to the relevant unit holders," it added.
The investors are being compensated for amounts as small as a few hundreds of rupees, but the overall compensation for all investors put together could not be ascertained.
According to sources, HDFC MF has already begun the process to compensate investors and paid most of the money. In the next 10-15 days, it will pay all the affected investors.

The final order by Sebi was passed in January and the fund house has begun the process this month, they added.
The regulator had conducted a probe after receiving two separate references from the BSE and the National Stock Exchange (NSE) on suspected instances of front-running of the orders of HDFC MF.
Earlier in January, Sebi had ordered Kapadia, his wife Kalpana Kapadia and five other connected persons to disgorge Rs 3.35 crore worth of illegal gains made by them.
As per Sebi's interim order of June 2010, certain entities had made substantial intra-day profits by front-running the orders of HDFC AMC between April and July 2007.

In its final order passed in July 2014 against Kapadia and three others, Sebi had further ordered return of over Rs 1.75 crore worth illegal gains.