SEBI Imposes ₹5 Lakh Penalty On HSBC Asset Management For Inadequate Investment Decision Documentation

The scrutiny began with the examination of HSBC AMC's investment decisions focusing on transactions involving three stocks: Hindustan Zinc, Sadbhav Engineering, and Vodafone Idea. The sale of these stocks resulted in substantial financial losses amounting to ₹42 crore. Losses from Hindustan Zinc, Sadbhav Engineering, and Vodafone Idea were ₹1.61 crore, ₹14.97 crore, and ₹25.43 crore, respectively.

HSBC AMC, which acquired L&T Investment Management in May 2023 and subsequently merged it into its own operations was found to have inadequately recorded the rationale behind its investment decisions. Regulation 25(2) of the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996 mandates that asset management companies exercise due diligence and care in all investment decisions akin to other industry participants.

SEBI Circular No. MFD/CIR/6/73/2000 dated July 27, 2000 directs mutual funds to maintain records that provide data, facts, and opinions supporting each investment decision. It also requires that detailed research reports be prepared for initial investments and that reasons for subsequent purchases and sales be recorded.

The initial adjudicating officer's order from August 23, 2023 found that HSBC AMC did not violate these provisions. The officer concluded that the SEBI circular lacked clarity and that no specific timelines were provided for updating research reports. Thus, the officer ruled that HSBC AMC had not breached any regulations, and no penalty was warranted.

However, this order was subsequently reviewed by SEBI's whole-time member who found significant errors in the earlier adjudicating officer's findings. SEBI's review noted that the previous order was erroneous and not aligned with the interests of the securities market. It noted that HSBC AMC failed to provide adequate documentation for its investment decisions and the reasons behind the sales of the aforementioned stocks.

SEBI's review identified three primary violations:

1. Non-maintenance of Records: HSBC AMC failed to maintain proper records that documented the data, facts, and opinions leading to each investment decision.
2. Inadequate Documentation: The reasons for subsequent investment decisions, such as the sale of stocks, were not adequately recorded, contrary to the requirements of the SEBI circular.
3. Failure to Verify Due Diligence: There was a lack of a systematic mechanism to verify that due diligence was being exercised in investment decisions.

Consequently, HSBC AMC was penalized ₹5 lakh under section 15HB of the SEBI Act, 1992.