Securities and Exchange Board of India (SEBI) has imposed a penalty of Rs5 lakh on HSBC Asset Management (India) Pvt Ltd for failing to maintain proper records. This decision follows SEBI's decision to revise an earlier order issued by its adjudicating officer (AO) Barnali Mukherjee exonerating the asset management company (AMC).
In an order, SEBI's whole-time member, Kamlesh C Varshney, says, "I find that HSBC Asset Management, erstwhile L&T Investment Management Ltd has erred in assuming that the defaults are minor in nature. The current proceeding is relating to the violations wherein the asset management company (AMC) is found failing in exercising due diligence in their investment decisions and in the maintenance of records as mandated by SEBI."
SEBI examined the 23 August 2023 order passed by the AO to ascertain whether the order is erroneous to the extent it is not in the interest of the securities market.
SEBI observed that the AO had erred in acquitting HSBC Asset Management merely relying on the submission that the AMC was actively tracking the investee companies and that it had maintained data, facts and opinions leading to its each investment decisions when the same did not get support of any evidence.
SEBI then issued a show-cause notice to HSBC Asset Management as to why the AO order should not be revised and appropriate penalties should not be imposed on the AMC. The SCN alleged failure by the AMC to exercise due diligence in its decisions to invest in the scrips of Sadbhav Engineering Ltd, Vodafone Idea Ltd, and Hindustan Zinc Ltd.
Mr Varshney, the SEBI WTM, observed that investments made by HSBC Asset Management in all three scrips sold later and for which, no record(s) detailing the reasons had been maintained and furnished to justify such decisions. He says, "There is no dispute that for subsequent sale, there is the requirement of recording reason. Records before me show that HSBC Asset Management had used phrases such as 'need to raise cash for tactical reasons', 'reducing exposure' and 'switching to better opportunities' and submitted the above as a reason to be in compliance with the relevant provisions of the July 2000 circular."
"The very purpose of the July 2000 circular is to require AMCs to maintain proper reasons in support of each of their investment decision, so as to enable the AMC to produce the same when called upon to justify the reasons for their investment decisions. Just recording standardised phrases alone cannot be treated as compliance with the provisions of the July 2000 circular. Therefore, it may not be right to hold that mere recording of phrase sans the justification behind the phrase is sufficient compliance of the July 2000 circular," the WTM added.
The SEBI WTM also rapped Ms Mukherjee, the AO, for misinterpreting the July 2000 circular issued by the market regulator. He says, "As regards the finding arrived at in the order under review by the AO relying on the internal note to record that July 2000 circular lacks clarity and requires clarification, it is observed that mere reliance on the internal note having an opinion of one officer, to arrive on the conclusion of ambiguity is erroneous. Views expressed in the internal note without the approval of competent authority are just an opinion of an officer and cannot be the basis to conclude it as being the views of the department."
"I find that the AO has erred in exonerating HSBC Asset Management from the allegations and the same is erroneous to the extent that it is detrimental to the interest of securities market. I also find that HSBC Asset Management has not been successful in demonstrating that it acted diligently so far as investment decisions pertaining to the three scrips are concerned and established a mechanism to monitor due compliance of the provisions as alleged in the SCN. Thus, the AMC is not in due compliance of the sub-regulation (2) of regulation 25 read with clause 9 of Fifth Schedule –Part A of the MF Regulations and July 2000 circular," the SEBI order says.
