SEBI was probing whether the fund house had properly recorded the reasons for its investment decisions, among other things. The market regulator was also looking into the reasons for sale of three shares — Hindustan Zinc, Sadhbav Engineering and Vodafone Idea — which resulted in losses of Rs 1.61 crore, Rs 1,497 crore and Rs 2,543 crore, respectively. The total loss was recorded at Rs 4,200 crore.
The case pertains to L&T Investment Management (L&T AMC), which was earlier part of L&T Mutual Fund and was acquired by HSBC Group in May 2023. It was subsequently merged into HSBC Asset Management.
HSBC AMC was required to record the reasons for its investment decisions in accordance with the conditions laid down in a July 2000 Securities and Exchange Commission circular.
However, the adjudicating officer, in his August 23, 2023 order, said the July 2000 notification “lacked clarity as to the details which the AMC had to consider while taking subsequent investment decisions and further the note proposed to issue an explanation and hence no violation has been established.” The AO also held that the MF Rules and the July 2000 notification did not provide a timeline for updating the research report. “In the absence of a timeline, it may not be correct to hold the notified party (HSBC AMC) liable for not updating,” the order said. On November 6, 2023, Sebi issued a Show Cause Notice (SCN) to HSBC AMC to explain why the AO’s order should not be investigated and revised and no penalty should be imposed. In its defence, HSBC AMC argued that the SCN was without jurisdiction and not legally sustainable. It was also said that the SCN contained factually incorrect and incorrect statements.
The company also noted that during the inspection, the auditors reviewed the records and in the supplementary show-cause letter dated June 16, 2023, had noted the documentation and records of analysts’ research reports for each of the three aforementioned securities.
Prior to this, the Securities and Exchange Commission had appointed an independent auditor to carry out an examination of L&T Mutual Fund with respect to L&T Investment Management for the period from April 1, 2019 to March 31, 2021. The examination report was submitted to the Securities and Exchange Commission in July 2022 and found anomalies in the preparation and maintenance of records and rationales for investment decisions by the company.
Adjudication proceedings were then commenced against HSBC AMC, which issued a Notice to Show Cause on 20 March 2023 and a Supplemental Notice to Show Cause on 16 June 2023.
The 37-page SEBI order issued today said, “I am of the opinion that the AO’s order is erroneous and prejudicial to the interest of the securities market. I further hold that the ends of justice will be sufficient to be achieved by exercising the powers conferred upon me under sub-section (3) of Section 15-I of the SEBI Act, 1992 and imposing penalty of Rs. 50 lakh (Rupees Five Million Lakhs only) on the notifiers under Section 15HB of the SEBI Act, 1992.”
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