If you have been in the equity markets for 30 years you have some advantages. First you have seen many players come and go. You keep wondering how many are genuine, how many are fake. Over this period you classify people into platinum, gold, silver, …and of course mud.

Fund managers also come in various shapes and sizes….but clearly HDFC as a group is there at the top. Not to say mistakes do not happen, but it is contained. Action is taken against the guilty and the systems strengthened. This is true for Hdfc ltd., Hdfc securities, Hdfc bank and surely the same culture must be there at Hdfc Amc and Hdfc Standard life insurance. Mr. Deepak Parekh – and therefore all his CEOs set very high standards…

However one equity dealer (employee) has played dirty. He must have taken a lot of precautions. He just forgot that ‘there is no right way of doing a wrong thing’. Basic fundamental rule which thieves forget.  This is not uncommon – after all these are kids in the ‘Greed is Good’ times when Wall Street has gone beserk. If Grasso could justify a $ 140 Million bonus…what is a few crore Indian rupees.

Kapadia seems to have done ‘front running’. Front running is buying the shares in your personal account before you buy for the fund. This allows you to profit quite handsomely – because the fund’s buying takes the share up….and then you sell. That is what Kapadia and his friends have done. Or seems to have done.

What SEBI has done is a good investigation against Kapadia, Sanghvi and Mehta regarding transactions done in the year 2007 and has asked the AMC to do more detailed investigations.

One MNC for whom I used to do internal audit had the power to ask the employee to give a declaration about all his bank accounts (demat was not yet in and this was an engineering giant). In one case we did find payments from dealers in the employee’s father’s account. However sacking the employee was the only solution.

One group in the south has sacked people for traveling 2nd class and claiming 1st class…

One brokerage house sacked a few top executives for doing transactions without completing K Y C formalities – there are millions of instances. As a CA you get to hear some stories, as a broker you get to hear some stories…however nothing really comes out. Or it is killed before it comes out.

This incident must be a complete nightmare not only for the management of hdfc and its associates but also the trustees, custodian, internal auditor, outside directors, and the top management which would just be answering calls. This wake up call is for others who also manage money in a pool – be it a pms, a mutual fund, or a life insurance company.  Too much is at stake.

For people like us who have trusted this brand since 1980 as a shareholder, as a fixed deposit holder, bank account holder, demat account holder, fixed deposit holder, brokerage account holder, as a mutual fund unit holder, as a life insurance policy holder,….this is quite a hit. Since the news broke (yesterday evening for lesser mortals like me) at least 4 people have asked…’Is my money safe…’. Last week my voice would have had more conviction. Now I am waiting to see what the trustees have to say. Remember it is their responsibility to ensure that the back end processes are robust and keep the industry free of risk.

Hopefully the management will improve the internal controls (I am sure the simple things like no cell phone in the dealing room, daily portfolio declarations, etc. must already be in place).

I have no clue what new tricks employees will find and what new steps companies will take….best of luck Hdfc.

anyway the sebi order against nilesh kapadia, rajiv ramniklal sanghvi,…is worth reading..here are the details…orderhdfc

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  1. Boss
    Hats off to your reading radar. No other buisness, they say, pays you big money for your talk as equity market pays.

  2. I read on one blog (I think that is on this blog only) that the guys from business channels would pass on the information (tips) to Stock Brokers before they announce them on their business channels so that Stock brokers can buy/sell the stock before the retail public can buy/sell them on the basis of tip from the business channel. For this the guys of business channels were paid around a lakh per month!!!. Is this not a front running??? Then why not SEBI investigate them too???

  3. Praveen

    that was a story on MoneyMantra – in fact Awanish the editor did as an editorial. Surprising that one part of the media took on another part of the media.

  4. Sebi has levied a fine…and the amc is paying it.

    HDFC Mutual Fund CEO Milind Barve said that the AMC would not contest SEBI’s charges and that what had happened was a breach of trust by an employee.

    He also said that HDFC would immediately deposit the entire fine amount.

  5. hi subra
    the amount is not fine, but the amount which they robbed from unit holders by causing loss to them.The profit which they have earned by fraudulant means and by breach of thrust.They earned X rupees by transgression and paying back that rupees X. where is fine or penalty involved here? The authorities must ask them to deposit 2X rupees, that would be fair.

  6. Your article is so polite in dealing this HDFC front running case, but in some cases like Shankar sharma of first global..medias are making it very big breaking news. What a different look .. Moreover Sebi has given HDFC time to strengthen the internal system.. What a advice of regulators to HDFC

    not to do the same or
    not do the same by knowing to others ????

    Trust the system…..

  7. There is somebody out there with balls in SEBI. Congrats. This is the first time that a SEBI order (to the best of my knowledge) has used the word front running. I hope this came out of an investigation / surveillance software of SEBI and not some disgruntled insider. If I am not wrong Nilesh has spent a long time with Hdfc mutual fund. Not sure about his antecedents nor am I sure that I want to put it in a public place even if I know it. Sure Subra would know Nilesh’s antecedents or would have found out. No other sebi head would have taken such powers that be head on. Congrats SEBi. Way to go.

  8. The quantum of fine seems to be piddly! Normally very little of insider trading actually comes out – so the fines have to be a multiple of the amount the customers (unit holders) have lost. Let us look at it this way – Hdfc amc has accepted the guilt. So Mr. Kapadia will find avoiding prosecution very difficult. And Hdfc amc will also sue him for damages. His bankruptcy declaration is a given except for the balance in his ppf. No clue how much money he has kept in his family member’s name. Some of them may be emboldened to say ‘buzz off’ will not give it back to you.

    Frankly if Rs. 2.5 crores were lost by the unit holders, then the internal auditor, trustee (responsibility to make sure that the systems are there and the systems are working) are all responsible.

    So there should be a Rs 5 crore fine on the AMC, Rs. 5 crore fine on Nilesh Kapadia, Rs. 2.5 crore on all the trustees, and a warning to the CEO and the CIO. That would be a little fair.

    Out of this Rs. 5 crore should be put in the schemes which are effected….

  9. Partially agree with Vishwanath..but if Hdfc claims to be such a big brand name (which it is anyway) should it not on its own put in Rs. 5 crores into the affected fund schemes? After all the thief who puts his hand into the cookie jar, AND HE IS CAUGHT, he is never allowed to eat the cookie, correct? Assuming HDFC amc caused the loss to the unit holder, they have to pay the unit holder (with adjusted nav obviously)- WHY does this have to be TOLD by sebi or others??? beats me

  10. Vivek Law of ‘beware’ (cnbc program) is claiming that they broke this story and because of them SEBI has got more vigilant. is it true?

  11. Hi,
    We keep on hearing that you need to remain invested for long terms in case you really need to earn higher returns. HDFC is an international brand is infected with 3 idiots having crooked mind. What about such personalities existing in other fund houses?
    Considering the amount of money involved in so many infinite number of scams in our country and the actions taken against the culprit is known to everybody.
    I personally feel that there is involvement of everybody …i mean top to bottom else such scams would not happen.
    I am of the firm opinion that if you have excess fund lying idle with you then only one should enter this one way traffic road else it is suicidal. As in most of the cases for small investor the need for money is always there and in most of the cases due to some reason he finally end up loosing money.
    I dont think more than 5 % households of our country remain invested on long term basis . Hence this is all unnecessary hype created for time pass and if you analyse most of the fund houses are managing without ethics …i mean full of wrong practices.

    I am writing this because I have yet to come across small investor who has gained from market….

  12. considering the scams everywhere in the country, is not ok to get invested for long term in Shariabees?
    Please leave your comment.

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