In a significant decision, the Securities and Exchange Board of India has barred Samir Arora, chief investment officer of Alliance Capital Asset Management (India) Private Limited (ACAML), from dealing in securities, directly or indirectly, till further orders with immediate effect for alleged insider trading and non-disclosures of investments.

SEBI whole time member T M Nagarajan in his order issued on Saturday said, "I find from the investigation that there is a prima facie case of insider trading against Arora.

"He being the fund manager at Alliance Capital Mutual Fund (ACMF) and FIIs/sub-accounts of US-based Alliance Capital Management (ACM), was responsible for the alleged non-disclosures and wrong disclosures under SEBI's regulations.

Apart from this, Arora's arrangement with Henderson Global Investors for the purchase of ACM's stake in ACAML was in conflict with his interest as a fund manager."

"Arora may file his objections, if any, within a period of 15 days and also avail of a personal hearing, if he so desires, on August 28 at the SEBI office, failing which it shall be presumed that he has nothing to say in the matter," Nagarajan said.

"Prima-facie, the conduct of Arora is not in consonance with high standards of integrity, fairness and professionalism expected from a fund manager. His conduct erodes investors' confidence and is detrimental to their interests as well as the safety and integrity of the securities market," he added.

Considered the glamour boy of the fund-management industry, Arora, who is also the head of emerging Asian markets for Alliance Capital, had resigned earlier this week and is slated to join SabreCapital Worldwide, which intends to float a new firm and enter the asset management business in India.

The SEBI order said it was found during the investigation that Arora played a 'pivotal role' in thwarting the plan to sell ACM's stake, which by and large contributed to the loss of approximately Rs 1,300 crore in the assets under management of ACMF and also to a loss to investors due to the fall in the net asset value (NAV) of the schemes.

ACM had confidentially invited bids in October 2002 for sale of its stake in ACAML.

In February 2003, ACM issued a release stating inter alia that after evaluating all options, it had decided to retain its ownership interest and would continue to manage and support

ACAML as an on-going asset manager in the Indian market and Arora would continue in his positions.

Investigations showed that out of 11 bidders, five were selected for a second round of negotiations between January 13 and 29, 2003.

It was revealed that during the week beginning January 13, one of the bidders approached ACM for pre-empting the bidding process and proposed to proceed immediately to a final agreement.

It was further observed that while talks were in progress, ACMF experienced large scale redemptions, which resulted in fall of NAV of certain schemes.

SEBI said Arora and two equity analysts of his team had informed the ACM management (when discussions with bidders were on) that they did not intend to work for any bidder other than Henderson Global Investors, with which Arora had worked out a joint venture arrangement for acquiring ACAML. 

SEBI said as per the arrangement, Arora agreed to work full-time for the new company, after quitting ACM, and for that he would have received a six per cent share of the new entity immediately and another 13 per cent over the next five years.

Henderson also said it was interested in bidding only if Arora joined them.

Arora has further stated that the bid made by Henderson was for an absolute sum of $36 million.

Therefore, if Henderson was successful in acquiring the stake, Arora would have got an immediate personal gain of approximately Rs 10 crore and another Rs 20 crore or more in another five years. It was therefore in his personal interest that none of the other bidders bought the mutual fund.

"In order to achieve his selfish objective Arora made it known to the public that he would be exiting from the mutual fund. The equity analysts working with him followed suit," SEBI said.

Investigations revealed that following Arora's decision, the equity analysts also informed the management that they did not envisage working for other bidders but would negotiate

with them separately, if they won (the bid). This created uncertainty and speculation with regard to the future of the mutual fund, Nagarajan said in his order.

From November 2002 till January 2003, the AUM of ACMF at the end of each month declined sharply from Rs 3,706.91 crore to Rs 2,408.78 crore, a decline of about 35 per cent in a period of two months.

Such a fall was unprecedented and specific to ACMF.

By this aforementioned conduct, Arora also brought down the mutual fund's value so that he and Henderson could acquire the mutual fund at a cheaper price, Nagarajan added.

SEBI said investigations further revealed that Arora was managing funds belonging to ACMF, ACM - the ultimate parent of ACMF, which is a SEBI-registered FII, and its sub-accounts.

He invested a significant portion of funds in certain mid-cap companies with low floating stock. It was also found that he and his team maintained a close rapport with such

entities and their senior management for extracting crucial un-published price sensitive information and used such information for making investment decisions.

ACMF, FIIs and sub-accounts of ACM, being persons acting in concert (PAC) did not make declarations to the respective companies when their shareholding crossed the threshold limit of five per cent in the case of Balaji Telefilms Ltd (BTL), Digital Globalsoft Ltd (DGL), Mastek Ltd, Hinduja TMT Ltd (HTMT) and United Phosphorous Ltd (UPL) as required under SEBI's regulations.