The Securities and Exchange Board of India (SEBI) has imposed a penalty of Rs 5 lakh on HSBC Asset Management (India). This decision follows the revelation that a previous order from 2023, which had cleared the fund house of any wrongdoing during an investigation, was found to be erroneous and not in alignment with the principles of market integrity.
This penalty pertains to actions by L&T Asset Management Company (AMC), which HSBC Group acquired in May 2023. Following the acquisition, L&T AMC was merged with HSBC AMC in October 2023. The investigation by SEBI focused on whether the fund house had properly documented the rationale behind its investment decisions, especially scrutinizing the reasons for selling three specific stocks: Hindustan Zinc, Sadbhav Engineering, and Vodafone Idea. The sales of these stocks led to significant financial losses: Rs 1.61 crore, Rs 14.97 crore, and Rs 25.43 crore, respectively. Altogether, these losses amounted to over Rs 42 crore.
Upon review, Kamlesh C Varshney, a whole-time member of SEBI, concluded that the previous order was erroneous and not in the best interest of the securities market. As a result, on November 6, 2023, SEBI issued a show-cause notice to HSBC AMC, questioning why the earlier order from August 23, 2023, issued by an adjudicating officer, should not be reviewed and potentially revised, including the imposition of a penalty.
The earlier order had stemmed from SEBI's directive for an independent auditor to inspect L&T Mutual Fund's operations covering the period from April 1, 2019, to March 31, 2021. This audit report, delivered on July 15, 2022, highlighted discrepancies in record-keeping and the reasoning behind investment decisions.
During the adjudication process, the officer had cleared the fund house of any wrongdoing, citing that SEBI's July 2000 circular, which outlined the details AMCs needed to consider for future investment decisions, was unclear. Additionally, the adjudicating officer noted that both the Mutual Fund Regulations and the circular did not specify deadlines for updating research reports, making it unreasonable to hold the AMC accountable for not updating them. Furthermore, the officer mentioned that the AMC claimed it continuously monitored the stocks of investee companies. In the absence of evidence to the contrary, the claim of insufficient due diligence due to the un-updated research report was not substantiated.
Following the reassessment, SEBI determined that the previous order did not align with the principles of market integrity and transparency. Kamlesh C Varshney's review emphasized that the fund house's lack of proper documentation and clear rationale for their investment decisions, especially when dealing with significant financial losses, necessitated a penalty to uphold market discipline and investor confidence. The reassessment underscored the importance of thorough documentation and the need for AMCs to maintain accurate records of their investment decisions to ensure accountability.
The penalty highlights SEBI's commitment to ensuring that asset management companies adhere to high standards of transparency and accountability. Proper documentation of investment decisions and maintaining accurate records are crucial in protecting investors' interests and maintaining trust in the financial markets. This case serves as a reminder to all asset management companies about the importance of adhering to regulatory requirements and maintaining thorough documentation of their investment decisions.
The imposition of a Rs 5 lakh penalty on HSBC Asset Management (India) sends a clear message that SEBI is dedicated to safeguarding the integrity of the securities market and protecting the interests of investors. SEBI's actions demonstrate the regulator's unwavering commitment to enforcing regulations and ensuring that asset management companies operate with the highest standards of diligence and transparency. This penalty serves as a precedent, emphasizing the critical nature of regulatory compliance and the need for continuous monitoring and updating of research reports and investment decisions.
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