The income-tax department, which said it conducted searches on a former official of Axis Asset Management Co. and others associated with the company in connection with a case of suspected frontrunning, also questioned two serving executives of the mutual fund house, people familiar with the matter told Moneycontrol.
“The Income Tax Department carried out a search and seizure operation on July 28 on an ex-fund manager and chief trader of equities of a prominent mutual fund house along with related sharebrokers, middlemen and entry operators,” the finance ministry said in a statement on August 5.
The search covered more than 25 premises spread across Mumbai, Ahmedabad, Vadodara, Bhuj and Kolkata, the ministry said, without identifying the fund house and the individuals.
The “ex-fund manager and chief trader of equities” mentioned in the ministry’s statement is Axis AMC’s former fund manager and chief dealer Viresh Joshi, who was sacked in May following allegations he was involved in frontrunning, the people said.
The department also questioned Jinesh Gopani, head of equity at Axis AMC, as part of the search and seizure operation, the people said.
Pawan Jhangiani, a dealer at Axis AMC, was questioned by the income-tax authorities in searches conducted over the past month. He is still employed by Axis AMC, according to information on the fund house’s website.
The Central Board of Direct Taxes, a division of the finance ministry that supervises the functioning of the income-tax department, declined to comment on the matter.
Regulatory examination
The finance ministry said during the search operations, the tax department found evidence of fund manager and chief trader sharing specific trade-related information for illicit gains.
Axis AMC, which carried out its own investigation into the matter, also hired three external agencies to probe any irregularities in the company. The frontrunning allegations also led the market regulator to look into the matter.
The regulator is examining Axis AMC CEO Chandresh Nigam’s conduct as well as the operations of the fund house, the people said.
The Securities and Exchange Board of India wants to find out if any senior official at the fund house is being protected and if there is a possibility of a conflict of interest, said one person aware of the regulator’s examination.
“Although the report by a premier law firm (AZB & Partners) has been submitted to SEBI, a lot is still being examined,” this person said. AZB & Partners was one of the three agencies appointed by Axis AMC to probe irregularities at the AMC.
All the people that Moneycontrol spoke to for this article did not want to be identified.
Frontrunning is when a mutual fund employee uses inside knowledge about orders that his employer has lined up for personal gain.
A spokesman for Axis AMC said its own investigation found nothing incriminatory against anyone other than Joshi and another trader, Deepak Agarwal, both of whom were sacked in May.
“Axis AMC’s internal investigation has not found anybody other than Mr. Viresh Joshi and Mr Deepak Agarwal as potentially having breached securities laws and believes basis detailed investigations (over five months) by reputed experts that this is not a systemic issue involving any other fund managers or others at Axis AMC,” the Axis AMC spokesperson told Moneycontrol. “We continue to work and cooperate with regulatory authorities and cannot comment on ongoing investigations by them. All members of the equity investment team of Axis AMC continue to discharge their respective responsibilities under the leadership of Mr. Chandresh Nigam, managing director and CEO, and Mr. Jinesh Gopani, Head – Equities.”
Axis AMC neither confirmed nor denied that Gopani was among those whose premises had been searched. The fund house did not confirm or deny if Nigam had been called in for questioning by the Income-Tax Department.
Three brokers
Gopani’s brother-in-law Biren Mehta, a broker at Elara Capital, was among those who were questionned, said another person familiar with the matter. Mehta and Elara Capital did not comment for this article.
Additionally, Moneycontrol got the names of at least three brokers in Mumbai and Gujarat whose premises were searched by the income-tax authorities. The three brokers were not immediately traceable. Since they could not be reached for comment, Moneycontrol is withholding their names.
The search operations conducted from July 28 to August 2 were among a string of searches and questioning conducted by SEBI and the IT department over the past roughly two months.
Probe completed
Last month, Axis AMC said it had concluded its internal investigation in the frontrunning case.
“The findings till date have been shared with the regulator,” the fund house said in a statement on its website.
The AMC added that Joshi had “committed clear breaches of our policies, including non-cooperation of our internal investigation (during his suspension period). We also have strong reasons to believe, based on available evidence, that there have been breaches of securities law by him.”
Axis AMC appointed law firm AZB & Partners and management consultant Alvarez & Marsal to investigate any irregularities at the fund house. In May, the fund house also brought in audit and consulting firm Deloitte to join this investigation.
The unravelling
Moneycontrol was the first to report whispers on the street about alleged wrongdoing by a dealer at a large fund house.
On May 6, Moneycontrol broke the story that Axis Mutual Fund had suspended chief dealer Joshi and assistant fund manager Agarwal after allegations of frontrunning.
On May 18, the fund house sacked Joshi while he was investigated for irregularities. At the time, Axis AMC didn’t comment on the reasons for the changes. Axis MF later confirmed it had been conducting a suo moto investigation since February 2022 and had appointed reputed external advisers to aid in the investigation.
The fund house has so far not publicly disclosed the exact nature of wrongdoings. However, Moneycontrol has a copy of the severance letter it served to Joshi on May 18, which stated five reasons for his sacking. In the letter, the fund house also accused Joshi of violating securities laws. The termination letter did not mention specific allegations or frontrunning.
In June, Joshi filed a lawsuit accusing the AMC of unfairly terminating his employment without clearly specifying the charges and even before the investigations ended.
All about frontrunning
Frontrunning is illegal in India. Frontrunning is when a dealer with an institutional money manager like a mutual fund takes advantage of his knowledge of orders that his employer has lined up for the day and tries to profit from them.
If the dealer wants to profit, he enters the market minutes before the mutual funds places orders on the stock market, which are usually large and can move stock prices.
The dealer buys or sells these stocks minutes before the mutual fund places the trades, with the objective of making a profit by either buying or selling the shares.
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