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regular-article-logo Saturday, 22 June 2024

SEBI tweaks mutual fund regulations to stop front running in asset management companies

Front-running is an illegal practice in the stock market where an entity or an individual buys or sells securities based on advance or inside information that is not available to the public

Our Special Correspondent Mumbai Published 01.05.24, 09:09 AM
Representational image

Representational image File picture

The board of Securities and Exchange Board of India (Sebi) on Tuesday approved changes in mutual fund regulations to prevent front-running in asset management companies (AMCs).

Fund houses have been directed to set up an institutional mechanism to identify and prevent market abuse.

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Front-running is an illegal practice in the stock market where an entity or an individual buys or sells securities based on advance or inside information that is not available to the public.

The participant makes gains when the information becomes public and the security moves in a particular direction.

Viresh Joshi, the former fund manager of Axis Mutual Fund, was pulled up for front running last year: in an interim order, Sebi had barred 21 entities, including Joshi, from the securities market.

It also ordered the impounding of wrongful gains worth 30.56 crore through “prima facie” front-running activities.

The market regulator said the board took note of recent front-running instances and approved amendments to Sebi (Mutual Funds) Regulations, 1996.

AMCs have been asked to put in place a structured institutional mechanism to check front-running and other fraudulent transactions in securities.

The mechanism shall consist of enhanced surveillance systems, internal control procedures and escalation processes to identify, monitor and address specific types of misconduct including front running, insider trading and misuse of sensitive information.

The board also approved amendments to the regulations to enhance the responsibility and accountability of the management of AMCs for such an institutional mechanism and foster transparency by requiring AMCs to have a whistle-blower mechanism.

Key meet

In a bid to enhance the participation of retail investors in the corporate bond market, the Sebi board has decided to slash the face value of non-convertible debentures (NCDs) and non-convertible redeemable preference shares (NCRPS)
issued in the private placement mode to 10,000 from 1 lakh.

Such debt instruments should be plain vanilla, interest or dividend-bearing instruments.

Sebi said FPIs based in IFSC can have a 100 per cent contribution to their corpus from NRI, OCI (overseas citizens of India) and resident individuals, subject to certain conditions. GIFT CITY in Gujarat is India’s first IFSC.

Currently, no single NRI can put more than 25 per cent in an FPI corpus, while they can invest up to 49 per cent as a group.

In another important decision, the board relaxed limits of investment by passive schemes in securities of group companies of its sponsor.

Mutual fund schemes are not allowed to invest more than 25 per cent of their net asset value (NAV) in the group companies of the sponsor.

Sebi had now decided to allow equity passive schemes, on indices to be specified by it, to take exposure up to the weightage of the constituents in the underlying index.

This exposure by the passive schemes would, however, be subject to an overall cap of 35 per cent investment in the group companies of the sponsor.

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