The Board of Directors of Securities and Exchange Board of India i.e. SEBI on Tuesday changed the rules governing mutual funds. Under this, it has been decided to make it mandatory for Asset Management Companies (AMCs) to establish an ‘institutional system’ to prevent possible market abuses. This institutional mechanism will monitor ‘front-running’ and fraudulent transactions in securities, besides detecting and preventing potential market abuses. Front-running here means the broker trading based on sensitive information that affects the price.
Preparations to crack down on front-running and fraud in AMCs
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) should be provided with an institutional mechanism to identify and prevent potential market abuses.regulatory framework) will have to be made. Along with this, the Board of Directors decided to increase the responsibility and accountability of the management of the asset management company operating the mutual fund for such regulatory framework.
According to a statement issued by SEBI after the meeting of the Board of Directors, the regulator wants AMC to promote transparency by creating a ‘whistleblower’ mechanism to raise voice against mistakes. 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. AMC-related malpractices include front running, insider trading and misuse of sensitive information. When a broker or investor gets involved in a business on the basis of confidential information, it is called ‘front running’. This is such sensitive information that affects the price of the asset.
SEBI meeting decisions
This decision of SEBI comes amid orders issued in two ‘front-running’ cases related to Axis AMC and Life Insurance Corporation of India (LIC).The statement issued after the meeting of the Board of Directors of SEBI said that the institutional arrangement i.e. the regulatory framework is expected to detect and report possible irregularities by AMC employees, dealers, stock brokers or any other related entities. Is performed. This should include advanced monitoring systems, internal control procedures and escalation processes to identify, monitor and address specific types of errors.
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.
“In view of the recent developments, the Board of Directors approved amendments to the SEBI (Mutual Funds) Regulations, 1996 to make AMCs a streamlined regulator to identify and prevent potential market abuses,” SEBI said in a statement. While SEBI will determine the broad framework of this institutional mechanism, the mutual fund body ‘Association of Mutual Funds in India’ (AMFI) will determine the detailed parameters for such institutional mechanism in consultation with SEBI.
Further, SEBI has streamlined the prudential norms for passive schemes with respect to securities of 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.
According to the statement, the Board of Directors of SEBI also resolved to address the issues faced by VCFs registered under the erstwhile Venture Capital Fund (VCF) Rules regarding inability to fully liquidate the investments of their schemes. The proposal has been approved. Under this proposal, such VCFs will get the option to migrate to Alternative Investment Fund (AIF) rules and avail the facilities available to AIFs in case of undeclared investments.
