HDFC Asset Management Company again under SEBI lens for shady trades

The Securities and Exchange Board of India , or Sebi, is investigating some employees of HDFC Asset Management Company , the country’s top fund house, for allegedly indulging in front-running, the illegal practice of buying or selling of shares by employees of a mutual fund to generate profits for themselves before executing orders of clients.This investigation is a new one and is a fallout of an earlier probe carried out by the securities market regulator. In the latest probe, Sebi is examining the possible involvement of some members of the fund management team of HDFC AMC in front-running.Two people close to the investigation confirmed that a new probe had been started, and much of the investigation was based on analysis of call records and trade data. They did not want to be identified as the issue is sensitive. “If an employee of the fund house has done trades once or twice, Sebi overlooks that. But if it is much more often, then it raises doubts,” said a person familiar with details of the investigation.A spokesperson for HDFC Mutual Fund confirmed that the new probe was related to the earlier one, which was settled last week through a consent process in which the entity probed made a payment in return for the case being closed. “Sebi has recently issued a consent order in the matter of the alleged front-running involving our exdealer.Further instances of the said matter are under investigation,” said the spokesperson. The term front-running is used to describe a trade that is executed based on prior knowledge of an impending highvolume share sale, which could have an impact on price.Essentially, a fund manager or broker buys a stock in their personal capacity —though rarely in their own name — before buying the same share for the fund in large volumes. The higher volume, in turn, results in the price of the stock moving up.Once this happens, the front-runner sells at a premium. For a mutual fund, frontrunning is at the cost of unitholders as it increases the cost of purchase of shares and they lose out in terms of better realisation when shares are sold.“Front-running is a dangerous practice... perpetrators of it should be brought under law. Since we do not have physical settlement, it will not be difficult for Sebi to book offenders. They will only have to scan through their broking and depository records to get evidence,” said Ashvin Parekh, partner at consultancy firm Ernst and Young. “Sebi should also introduce rules of guidelines that are self-regulatory in nature.They should mandate fund managers and others to certify themselves that they will not indulge in front-running or insider trading. If they are found engaged in such unethical practices, they should be brought before law,” Parekh said. HDFC Asset Management Company manages assets worth over Rs 91,0000000000, making it the top fund house, having outstripped Reliance Mutual Fund , which was at the top of the pecking order for the last few years.In June 2010, the regulator had banned an equities dealer of HDFC Asset Management from stock market transactions for allegedly leaking information of its trades to three market participants. A probe by Sebi had revealed 38 instances over 24 trading days between April and July 2007, when the three investors bought or sold shares before HDFC AMC's trades were executed.The regulator had said the three investors made combined profits of about Rs 20000000 during the period. Sebi had then said the interest of numerous unitholders of HDFC Mutual Fund and portfolio management clients of HDFC Asset Management Company were compromised due to the front-running orchestrated by the dealer of the fund house. The regulator directed HDFC AMC and the dealer to jointly deposit an amount equal to the estimated losses to the mutual fund's trustees.While that investigation was on, HDFC Mutual Fund, its trustee company and its chief executive Milind Barve moved a consent application to settle the case. The regulator accepted the terms of settlement proposed by the fund house. Last week, HDFC Asset Management and Sebi settled the charges by agreeing to pay Rs 5500000, and without admitting or denying guilt.