The Securities and Exchange Board of India has banned an equities dealer at HDFC Mutual Fund for front-running, along with three of his alleged collaborators, the market regulator said in a statement late on Thursday.
"Nilesh Kapadia... is prohibited from buying, selling or dealing in securities, directly or indirectly, or being associated with any intermediary or any entity registered with the Securities and Exchange Board of India, till further orders," the regulator said.
The practice of buying or selling securities on own account by taking advantage of prior knowledge of orders from clients is called front-running. Kapadia had allegedly leaked information of HDFC Mutual's trades to three market participants in advance.
Kapadia and the trio have been barred from stock market transactions until further notice. In its order, the market regulator revealed instances where investors Rajiv Ramniklal Sanghvi, Chandrakant P Mehta and Dipti Paras Mehta placed orders in the same set of stocks, just before those were traded by dealer Nilesh Kapadia on HDFC AMC's behalf.
Front-running, involves buying or selling of shares by employees working for investment funds or brokers before executing orders for the fund or clients. The employees often act in concert with market operators, who have the financial muscle to take up huge positions, and derive maximum benefit from the information. If the client is a mutual fund, unit holders lose out, as front-running increases the cost of share purchases or reduces the realisations from share sales.
SEBI's investigation 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 order said. The three investors made combined profits of about Rs2 crore during the period, it said.