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SEBI bans HDFC MF AVP Nilesh Kapadia for Front-Running


In a detailed investigation, SEBI found Nilesh Kapadia, AVP-Equities at HDFC Mutual Fund guilty of front-running trades that the fund was going to take:

The preliminary findings of investigation also revealed that Mr. Nilesh Kapadia, Assistant Vice President–Equities of HDFC AMC was tipping off and advising Mr. Rajiv Ramniklal Sanghvi to trade ahead of the orders of HDFC AMC and had helped him to make substantial gains in the process. Though, Mr. Nilesh Kapadia and Mr. 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 (April to July, 2007) when the instances of front-running identified by BSE and NSE, had taken place. It was also found that Mr. Nilesh Kapadia and Mr. Rajiv Ramniklal Sanghvi were college mates and had known each other since long. Evidence collected in the form of telephonic call records and the transcript of conversations between them reflect that, Mr. Nilesh Kapadia was tipping off Mr. Rajiv Ramniklal Sanghvi before placing the orders for HDFC AMC and Mr. Rajiv Ramniklal Sanghvi was trading on the basis of the
same. Mr. Rajiv Ramniklal Sanghvi was also reporting back to Mr. Nilesh Kapadia on the quantity executed by him, price details etc. Mr. Nilesh Kapadia and Mr. Rajiv Ramniklal Sanghvi after being confronted with the documents collected during the investigation, have admitted to their wrongdoing in their recorded statements under oath before the Investigating Authority

This includes detailed call transcripts and about 38 transactions amounting to a profit of 2 crore, in 2007. And the investigation was conducted after a report from the NSE. Nilesh has been the dealer for HDFC AMC since 2000. We have no idea how much front-running has already happened!

SEBI has asked HDFC AMC to make an internal inquiry, to deposit the 2.38 crores into an account till investigations are complete, and overhaul internal control systems immediately.

SEBI also baned Sanghvi and Chandrakant Mehta, two participants in the front running, from trading.

But would these help at all? Obviously this happens at the highest of levels. In the mutual fund industry, in equities,front running is a norm, and an unmentioned “perk”. If a) you are doing trades you are not required to reveal to the public immediately and b) you are trading with other people’s money, how can you stop front running? It’s impossible.

And is it any better with, say insurance companies? No. Or PMS? No – in fact, brokers have their own prop-trading accounts, and you can bet that if there is a big trade that will happen in a PMS account, it will have mysteriously happened a few minutes earlier in a prop-account.

In the US, it’s institutionalized. They don’t sell IPO shares directly to the public. Big investment banks pick them up at lower prices and sell them on the market at higher – the company does not benefit from a huge listing immediately; it only gets as much as the banks paid for it.

What do you think happens when a broker calls an HNI and says “why don’t you buy Xenotech foods” or some small share? Even Rs. 10 lakh worth investment in some small companies can make the price go to the upper circuit. If you’re able to buy, that simply means someone’s already bought the shares and selling to you at a profit.

In a way that might be good – if you tried buying the shares, you might hit upper circuit immediately. But on the other hand, you may buy in smaller chunked quantities, you may distribute your buying over many many days, and so on.

To avoid front running you should simply trade yourself. Don’t give your money to mutual funds or pension funds or anyone. Don’t listen to “tips” – the tipster may be front-running you. Do your own research. If you do it yourself, on a terminal that’s connected to the exchange, no one will be able to front run you. If every one did it, there would be no real way to front run trades. And then funds would be really small, running largely proprietary capital and therefore won’t front-run. If you’re going with a PMS make sure you find out how much of the manager’s net worth (+ family) is riding on the fund, get an auditor’s certificate for the purpose.

But everyone doesn’t have the time to do it themselves. So, front running will happen. Regardless of how many people SEBI catches; even if HDFC AMC is charged a larger fine (which they are not).


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