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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WTM/KMA/IVD/267/06/2010
SECURITIES AND EXCHANGE BOARD OF INDIA
ORDER
DIRECTIONS UNDER SECTIONS 11(1), 11(4) AND 11B OF THE SECURITIES AND
EXCHANGE BOARD OF INDIA ACT, 1992 AGAINST MR. NILESH KAPADIA, MR.
RAJIV RAMNIKLAL SANGHVI, RAJIV RAMNIKLAL SANGHVI (HUF), MR.
CHANDRAKANT P. MEHTA AND MS. DIPTI PARAS MEHTA