Market regulator SEBI has slapped a fresh show-cause notice on HDFC Asset Management Company and its CEO Milind Barve for alleged violation of its mutual fund and portfolio manager regulations.
The charges are distinct from an earlier case in June 2010, when SEBI had passed an order over the failure of HDFC Asset Management Company to prevent ‘front running’ at the fund house.
Front-running is an illegal practice of an intermediary (mostly stockbrokers) executing orders on a security for its own account while taking advantage of advance knowledge of pending orders from clients. It is quite rampant in India, say some experts. The latest move comes in the wake of SEBI observing 109 instances of information/instructions being passed by an employee of HDFC AMC to front-run HDFC trades, sources close to the development said. All 109 instances relate to trades put through from October 2006 to June 2007.
The show-cause notice — as to why action should not be taken — was served a few weeks ago, but an application for a consent order on the matter has now been filed with SEBI on behalf of HDFC Asset Management Company.
A consent order is an order settling proceedings between the regulator and an entity that may have violated securities laws. Until a decision is taken on acceptance of the consent application, the notice may not be pursued, sources added.
There is no legal limit on the number of times an applicant can come for a consent order before the capital market regulator, say legal experts. It will be up to a high-power committee to decide whether consent should be granted or not.
Wrongdoing charges SEBI had in the show-cause notice alleged that an HDFC dealer had passed information/instructions to front-run HDFC trades.
It pointed out that HDFC AMC was responsible for all acts of omission or commission by its employees. It alleged that HDFC trustees did not report these front-running activities to SEBI and that they had failed to detect and prevent them.
SEBI also alleged that HDFC AMC and HDFC Trustees did not maintain high standards of fairness in their business dealings.
What is front-running?
Front running is an illegal practice, one that experts say is quite rampant in India although the capital markets regulator has been trying to put an end to it.
It involves an intermediary (usually a stockbroker) executing orders on a security for its own account while taking advantage of advance knowledge of pending orders from its clients.
In the case of mutual funds, there are different possibilities for front running, based on information on trades that could be put through for clients.