2024-05-01 18:56:48
New Delhi: SEBI on Tuesday took steps to curb ‘front-running’ and insider trading in mutual funds. Under this, the SEBI Board of Directors decided that asset management companies (AMCs) will have to set up an institutional mechanism to identify and redress potential market abuses. With this, the Board of Directors decided to increase the responsibility and accountability of the management of AMCs operating mutual funds for such institutional mechanisms. According to a statement issued by the Securities and Exchange Board of India (SEBI) after the board meeting, the regulator wants AMCs to promote transparency by creating a ‘whistleblower’ mechanism to raise voice against wrongdoings. This is the first meeting of the Board of Directors of SEBI in the last one and a half months. Before this, a meeting was held on March 15.
What is front running?
According to SEBI, the institutional mechanism is expected to detect and report possible wrongdoing by AMC employees, dealers, stock brokers or any other related entities. This should include advanced monitoring systems, internal control procedures and escalation processes to identify, monitor and address specific types of errors. AMC-related malpractices include front running, insider trading and misuse of sensitive information. When a broker or investor gets involved in a business based on confidential information, it is called ‘front running’. This is sensitive information that affects the price of the asset.
The decision comes amid orders issued by SEBI in two ‘front-running’ cases related to Axis AMC and Life Insurance Corporation of India (LIC). In the Axis AMC case, broker-dealers, certain employees and related entities were found to be engaged in ‘front-running’ the businesses of the AMC. In the LIC case, an employee of a listed insurance company was found to be ‘front-running’ the deals.
Amendment approved
“In view of the recent developments, the Board of Directors has recommended amendments to the SEBI (Mutual Funds) Regulations, 1996 to enable AMCs to put in place a systematic institutional mechanism to identify and prevent potential market abuses,” the regulator said in a statement. While SEBI will lay down the broad framework of this institutional mechanism, mutual fund body ‘Association of Mutual Funds in India’ (AMFI) will lay down the detailed parameters for such institutional mechanism in consultation with SEBI.
Additionally, the regulator has streamlined the prudential norms for passive schemes in respect of securities of the sponsor’s group companies to provide a level playing field for mutual funds. At present, mutual fund schemes are not allowed to invest more than 25 per cent of their net asset value (NAV) in group companies of the sponsor.
Further, the Board of Directors of SEBI has approved the proposal to address the issues faced by VCFs registered under the erstwhile Venture Capital Fund (VCF) norms regarding inability to completely liquidate the investments of their schemes. Under this proposal, such VCFs will have the option to migrate to the Alternative Investment Fund (AIF) rules and avail the facilities available to AIFs in case of undeclared investments.