Sebi finds order exonerating L&T AMC 'erroneous', fines HSBC AMC Rs 5 lakh

The examination also looked into recording of reasons on the sale of three scrips--Hindustan Zinc Ltd, Sadbhav Engineering and Vodafone Idea--which resulted in losses of Rs 1.61 crore, Rs 14.97 crore and Rs 25.43 crore respectively.

The market regulator has imposed a penalty of Rs 5 lakh on HSBC Asset Management (India) on July 25, after finding that an earlier order passed in 2023 exonerating the fund house in an investigation was erroneous.

The order pertains to actions by L&T AMC, which was acquired by HSBC Group in May 2023 and merged with HSBC AMC in October 2023.

The Securities and Exchange Board of India (Sebi) was looking into whether the fund house had adequately recorded reasons for its investment decisions, among other things. The examination also looked into the reasons for the sale of three scrips - Hindustan Zinc, Sadbhav Engineering and Vodafone Idea - which resulted in losses worth Rs 1.61 crore, Rs 14.97 crore and Rs 25.43 crore respectively. In total, the losses were over Rs 42 crore.

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After re-examination, the regulator’s whole-time member Kamlesh C Varshney concluded that the earlier order was "erroneous to the extent that the same are not in the interests of the securities market."

Background

The regulator had issued a show cause notice to HSBC AMC dated November 6, 2023, asking the fund house why an earlier regulatory order dated August 23, 2023, passed by an adjudicating officer should not be examined and revised and penalty not be imposed.

The earlier order had been passed after Sebi asked an independent auditor to conduct an inspection on L&T Mutual Fund for the period of April 1, 2019, to March 31, 2021. The inspection report, which was submitted on July 15, 2022, recorded anomalies in the creating and maintaining record and rationale for investment decisions.

In the adjudication proceedings, the appointed officer had exonerated the fund house. The order said Sebi's July 2000 circular, which had directions on the details that had to be considered by the AMC while making subsequent investment decisions, lacked clarity. It also said that both MF Regulations and the circular did not have timelines for updating research reports and therefore it may not be right to hold the AMC liable for not updating the report. The order also said that since the AMC submitted that that there was constant monitoring of stocks for the investee companies and in the absence of evidence contrary to this submission, the allegation of lack of due diligence by not updating the research report did not stand established.

The adjudicating officer's (AO) order was examined by the regulator to see if it is "erroneous to the extent it is not in the interest of the securities market".

After this, the regulator made the following observations:

• The AMC had not produced any record or records detailing the reasons and documents that led to the investment decisions taken in Sadbhav Engineering.
• Reasons for subsequent decisions, that is, the sale of scrip of Sadbhav Engineering, Hindustan Zinc and Vodafone Idea were not properly recorded other than "simple recitals" such as "need to raise cash for tactical reasons", "reducing exposure" and "switching to better opportunities" respectively.
• Sebi also concluded that the AO had erred in "merely relying" on AMC's submission that it was actively tracking the investee companies and has maintained data, facts and opinion leading to its each investment decisions, "when the same had not got support of any evidence".

The observations also said that the "AO had grossly erred in relying on internal noting to record that the July 2000 Circular lacks clarity and a clarification is under contemplation" and that the AO "had gone beyond the show cause and relied upon a document as an evidence extraneous to the issue under consideration."