Monitoring, internal controls to check MFs’ front-running soon
The Securities and Exchange Board of India has approved amendments to its mutual fund regulations aimed at establishing an institutional mechanism to curb front-running and fraudulent transactions.
The markets regulator floated a consultation paper in this regard last May after noticing a significant spike in the number of front-running and insider trading activities.
Front-running refers to trading in a stock or any other financial asset while having inside knowledge of a future transaction. In February 2023, Sebi restrained the former chief dealer of Axis Mutual Fund, Viresh Joshi, and 20 other individuals from accessing the securities markets in a case of alleged front-running of the trades of Axis Mutual Fund.
“The mechanism shall conto-face sist of enhanced surveillance systems, internal control procedures and escalation processes to identify, monitor and address specific types of misconduct including front running, insider trading, misuse of sensitive information, etc,” Sebi said in a statement on Tuesday.
On the requirement to record all communication by dealers and fund managers, Sebi exempted recording facecommunications, including out-of-office interactions, during market hours. This will be made effective after implementation of the institutional mechanism by asset management companies.
The regulator asked industry body Association of Mutual Funds in India (Amfi) to specify detailed standards for such institutional mechanisms.
The regulator also approved streamlining of prudential rules for passive mutual fund schemes regarding exposure to the securities of group firms.
Currently, mutual fund schemes are not allowed to invest more than 25% of their net asset value in a sponsor’s group companies. This restricts passive funds to effectively replicate the underlying index in cases where the group companies of a sponsor comprise more than 25% in an index.
This also puts such asset management companies at a