Order in the matter of HSBC Mutual Fund Distributor

WTM/SR/IVD/ID-I/ /07/2014

BEFORE THE SECURITIES AND EXCHANGE BOARD OF INDIA, MUMBAI

CORAM: S. RAMAN, WHOLE TIME MEMBER

ORDER

Under Section 11, 11(4) and 11B of the SEBI Act, 1992 read with Regulation 11 of SEBI

(Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market)
Regulations, 2003 in the matter of HSBC Mutual Fund Distributor.
1. Securities and Exchange Board of India (SEBI) received a complaint dated January 01, 2013 from
Ms.Suchitra Krishnamoorthi (hereinafter referred to as “the complainant”) against the
Hongkong and Shanghai Banking Corporation Limited (hereinafter referred to as the
"Noticee") a Mutual Fund distributor. The complainant had inter-alia alleged that on account of
the actions on the part of the Mutual Fund distributor, the complainant suffered losses.

2. Upon receipt of the said complaint, SEBI initiated investigations for the period June 18, 2004 to
February 28, 2011 (hereinafter referred to as “investigation period”) to ascertain whether there
was any violation of SEBI Portfolio Management Service (PMS) Regulations, 1993, and Code of
Conduct for Mutual Fund Distributors and SEBI Act, 1992 by the Noticee with regard to the
Mutual Funds transactions in the complainant's account. Since, it was noted from the replies of
the Noticee that it did not act as a Portfolio Manager but is a registered Association of Mutual
Funds India (AMFI) distributor with No.ARN-0022. Accordingly, an investigation was carried
out to ascertain whether there was any violation of Code of Conduct for Mutual Fund
Distributors, SEBI (Prohibition of Fraudulent and Unfair Trade Practices) PFUTP Regulations,
2003 (hereinafter referred to as 'PFUTP Regulations') and SEBI Act, 1992 by the Noticee with
regard to the Mutual Fund transactions done on behalf of the complainant.

3. During the course of investigation, the following was observed :

a. The complainant was registered with the Noticee as a client of Retail Banking and Wealth
Management Services.

b. The Mutual Fund portfolio worth `5 lakh was created in June 2004 as per the bank
statements of the complainant submitted by the Noticee. On September 06, 2006,
November 23, 2006 and December 07, 2006, `1.4 crores, `2.2 crores and `15 lakh
respectively were deposited in the complainant's account. On January 11, 2007, `5 lakh was
also deposited in the complainant's account. These funds were used to invest in the Mutual
Fund portfolio of the complainant.

c. It was revealed in the investigation that there was excessive churning in the portfolio of the
complainant. The complainant's money had been invested in 38 different schemes of
various Mutual Funds. Some of the investments were also not in line with the risk profile of
the complainant.

d. It is also seen that a large number of the investments made in Mutual Fund Schemes were
redeemed in a short span of time and on many instances redemption proceeds were used to
invest in similar Mutual Fund Schemes.

4. The total commission/charges earned by the Noticee against transactions in the name of the
complainant was `27,93,844.60.

5. In view of the same, it was alleged in SEBI’s Show Cause Notice no.IVD/ID-
1/PM/AC/HSBC/28131/2013 dated November 01, 2013 that the Noticee violated the
provisions of Regulations 3 (a), (b), (c) and (d) and 4(1) of SEBI (Prohibition of Fraudulent and
Unfair Trade Practices relating to Securities Market) Regulations, 2003 and SEBI’s Circular No.
MFD/CIR/06/210/2002 dated June 26, 2002 prescribed under Regulation 77 of the
SEBI(Mutual Funds) Regulations, 1996 read with Clauses 1, 9 and 13 of the Code of Conduct
of Intermediaries of Mutual Funds.

6. The Noticee vide its reply dated December 10, 2013 stated the following :
I. The Noticee did not make investments on behalf of the client and acted pursuant to the
Client's specific instructions (LOI).

II. Transactions undertaken by the Noticee in relation with the complainant were in its capacity
as Mutual fund distributor and not as a portfolio manager.

III. Profiling of a client is based on standard questions put to them based on templated formats.
This is merely a subjective assessment and cannot be basis of all investment decisions of the
client.

7. Considering the reply submitted by the Noticee, an opportunity of personal hearing was granted
before me on March 5, 2014. Advocate Somasekhar Sundaresan of J Sagar Associates appeared
on behalf of the Noticee. It was submitted by the Noticee that efforts were on to settle the
matter amicably with the complainant. On the basis of the said submissions, the matter was
adjourned. Subsequently, the Noticee vide its letter dated March 20, 2014 informed SEBI that
the matter has been amicably settled. The Complainant vide letter dated July 1, 2014 also stated
that the matter has been settled with regard to the complaint against the Noticee.

8. Considering the fact that the complainant’s grievance has been redressed amicably by the
Noticee and taking into account the fact that the proceedings were initiated vide the said Show
Cause Notice no.IVD/ID-1/PM/AC/HSBC/28131/2013 dated November 01, 2013, solely on
the basis of the complaint, I am of the view that no further directions are required as against the
Noticee in this matter. Hence, the Show Cause Notice is disposed of without any further
directions in the matter.

Place : Mumbai S RAMAN
Date : July 28, 2014 WHOLE TIME MEMBER
SECURITIES AND EXCHANGE BOARD OF INDIA