HDFC AMC assistant vice-president (equity) Nilesh Kapadia has been charged with front-running of the orders of HDFC MF, which means that he tipped off his friends before the execution of the firm’s orders, resulting in gains for his acquaintances and reduced realisations for unit-holders of HDFC MF products

Barring an HDFC Asset Management Company (AMC) senior employee and three others from the securities market for irregularities in trading, market regulator Securities and Exchange Board of India (SEBI) on Thursday directed the company and its personnel to jointly deposit Rs2.38 crore to the trustees of HDFC Mutual Fund (MF).

SEBI in its order barred HDFC AMC assistant vice-president (equity) Nilesh Kapadia for helping his acquaintance and two others to gain from HDFC MF products at the cost of unit-holders. The other three persons barred are his beneficiaries.

SEBI also asked the mutual fund arm of housing major HDFC to submit a report on overhauling its internal control and preventive systems within a month.

"HDFC AMC shall not utilise the services of Nilesh Kapadia for trading activities done on behalf of HDFC AMC and shall institute an internal inquiry to be conducted by trustees of HDFC MF in the matter," SEBI said in the order.

Mr Kapadia has been charged with front-running of the orders of HDFC MF, which means that he tipped of his friends before the execution of the firms' orders, resulting in the gains for his acquaintances and reduced realisations for unit-holders of HDFC MF products.

HDFC AMC officials could not be contacted for comments.

The market regulator also asked the trustee of HDFC MF to constitute an investigation committee to examine if Mr Kapadia indulged in similar front-running activities on other occasions.

"The committee shall submit the final report to SEBI within six months of this order, explaining any such instances," the order said.

SEBI estimated the losses at Rs2.38 crore for HDFC MF schemes and its clients due to front-running of orders asking Mr Kapadia and HDFC AMC to deposit the same to trustees of HDFC MF.

The investigations by SEBI found 38 instances of front-running of the orders spread across Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) between April and July, 2007.

The preliminary findings of the investigation revealed that Mr Kapadia was tipping off and advising one Rajiv Ramniklal Sanghvi to trade ahead of the orders of HDFC AMC, helping him to make substantial gains in the process.

SEBI found that Mr Kapadia and Mr Sanghvi were college-mates and have known each other for a long time, even though they claimed in their statements to the market regulator that they did not know each other.

Tips passed on to Mr Sanghvi by Mr Kapadia have also been executed in the account of one Chandrakant P Mehta and Dipti Paras Mehta.

These three-Mr Sanghvi, Chandrakant P Mehta and Paras Mehta-were banned by SEBI from trading in securities till further orders.

SEBI said the interest of numerous unit holders of HDFC MF 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.

The market regulator said that Mr Kapadia and other entities involved can file their objections to the order within 15 days.