As reported by Sachin P Mampatta in on 29 August 2011:

SEBI: More front running at HDFC Mutual Fund

The Securities and Exchange Board of India (SEBI) is investigating HDFC Mutual Fund for front running once again.

Front-running happens when people in the know take a position in a stock based on the advance knowledge about a buying or selling action being planned by large institutions and investors.

The regulator had identified frontrunning involving an employee at HDFC Mutual and passed an interim order in June 2010.

DNA had filed an application under the Right To Information Act seeking an update on the status of investigations.

The regulator replied that investigations into front running identified in its order last year have been completed.

“Front running instances mentioned in the SEBI interim order dated June 17, 2010, have been completed and the proceedings are underway.”

“Further instances of front running in HDFC Mutual Fund have been identified and they are under investigation...” said the reply.

The regulator declined to share further information as the matter is under investigation.

India’s second-largest fund, which oversees Rs92,032 crore of assets, however, denied knowledge of any such investigation.

“‘We would like to clarify that there are no two investigations — ‘further
instances’ of alleged front running
pertain to the same Nilesh Kapadia
case (SEBI interim order June 2010),
we are actively cooperating with SEBI
on the matter,” said an HDFC Mutual Fund spokesperson.

The June 2010 order had said that Kapadia, an employee of HDFC Mutual Fund, passed on advance information about buy and sell orders placed by the mutual fund to a college mate.

He was involved in 38 instances of front running between April to June 2007 resulting in profits of nearly Rs2 crore in little over two months.

Subsequently SEBI banned Kapadia from the securities market and also from being associated with with any SEBI-regulated entity till further orders.

Those he passed on the information to — Rajiv Sanghvi, Chandrakant P Mehta and Dipti Paras Mehta — were also banned and told to deposit their illegitimate gains with the authorities.

SEBI told HDFC Mutual Fund to submit a plan to overhaul its internal control systems and take measures to prevent the recurrence of such instances.

This has already been done, said the HDFC Mutual Fund spokesperson.

“We have already implemented requisite preventive measures and taken appropriate steps to further strengthen our internal control systems and processes,” said the spokesperson.

HDFC is not the only mutual fund that SEBI has investigated for front running.

An investigation into front running at Tata Mutual Fund is still ongoing,according to a SEBI reply to the sameRTI query.

There was no response to a request for comment from Tata Mutual Fund.

L&T Investment Management, formerly known as DBS Cholamandalam Asset Management, settled charges in a similar matter through a consent order.

It filed an application proposing willingness to pay Rs10 lakh as settlement charges, without admitting or denying allegations that front running by one of its employees during April-May period in 2008.