MC EXCLUSIVE BofA likely to face adjudication proceeding over insider trading charges

FPIs are currently required to share details on their investor groups.

Capital market regulator Sebi may soon initiate adjudication proceedings against Bank of America (BofA) under the insider trading regulations, sources aware of the development have told Moneycontrol.

Two investment bankers of BofA who were under investigation and quit after an internal enquiry by the bank will also face adjudication proceedings.

A spokesperson from Bank of America has responded to Moneycontrol's query and said, "The bank's policies and procedures prohibit the misuse of material, non-public information and we take our obligations very seriously."

Market regulator Sebi is yet to respond to an email seeking comments on the issue.

As per sources, the actions of Bank of America and the investment bankers are a violation of Regulation 3 of the Prohibition of Insider Trading (PIT) Regulations, aimed at restricting misuse of unpublished price-sensitive information.

Another source aware of the case said while the evidence suggests neither the bank nor the investment bankers made any personal gains, there had still been a violation of the PIT regulations which fix the responsibility and obligation on all persons handling price-sensitive information, to ensure there is no misuse.

Regulation 3 (1) of the PIT says, “…no person shall procure from or cause the communication by any insider of unpublished price sensitive information, relating to a company or securities listed or proposed to be listed, except in furtherance of legitimate purposes, performance of duties or discharge of legal obligations.”

Sebi may also impose a penalty for fraudulent and unfair trade practices if the adjudication process confirms the violation, sources said. Under Section 15 HA, which deals with penalty for fraudulent and unfair trade practices, the penalty may range from Rs 5 lakh to Rs 25 crore, depending on the violation.

BofA and the two investment bankers were under the Sebi radar after a whistleblower complained last year about the practices followed at the bank. The whistleblower alleged that in a few issues handled by the two investment bankers, certain price-sensitive information was shared with investors on WhatsApp, before it was made public on exchanges in India.

Following the media reports, Sebi sought details from BofA about the process of pre-announcement meetings, records of such meetings, and the standard process for pitching to investors. Details of past issues handled by the two bankers involved were also sought.

The Wall Street Journal, citing the whistleblower’s complaint, reported that the two investment bankers of BofA were involved in the stake sale of Aditya Birla Sun Life AMC, the IPO process of First Cry and the rights issue of PNB Housing Finance. The whistleblower alleged that in these instances, the investment bankers had contacted investors through WhatsApp to share transaction details before the formal announcement was made. BofA had denied any wrongdoing at that time.

As per Sebi’s process, if a violation is suspected, an investigation is conducted and then a show cause notice is issued to the violator to respond to the allegations. An Adjudication Officer (AO) is appointed to begin the quasi-judicial process, and the officer conducts hearings, allowing alleged violators to present their case. The AO considers evidence, the show cause notice and the violator's response and passes an order. An adjudication order may bar the violator from the markets and also a monetary penalty.