SEBI Informs Mutual Fund Houses To Take Steps To Curb On Frontrunning

SEBI, the Securities and Exchange Board of India, has taken decisive action against front-running and insider trading within mutual funds, outlining an extensive strategy to combat market abuse along with relaxing investment constraints for index and exchange-traded funds regarding their ability to invest in sponsor group companies.

SEBI’s Guidelines

Asset Management Companies (AMCs) are now mandated to establish institutional mechanisms along with good surveillance, utilizing technology and data analysis, and identifying suspicious trading patterns, while stricter internal controls aim to prevent misconduct. SEBI has set clear guidelines that need to be established to ensure compliance and ethical conduct, it has also given direct accountability to AMC management for the effectiveness of these measures. Additionally, SEBI has established a mechanism that allows employees to anonymously report any form of misconduct. 

Flagged Case

These decisions follow SEBI’s discovery of front-running instances in Axis AMC and LIC, highlighting the urgency of regulatory action. In the Axis AMC incident, broker-dealers, specific employees, and affiliated entities were discovered to have engaged in front-running the trades conducted by the AMC. Similarly, in the LIC case, an employee of a listed insurance company was found to have front-run the company’s trades. As a response, SEBI took action by restricting Viresh Joshi, the former chief dealer of Axis Mutual Fund, along with 20 other individuals, from participating in the securities markets. This action was taken in connection with the suspected front-running of trades executed by Axis Mutual Fund. 

Prudential Regulations Update

SEBI has revised prudential norms for passive schemes, allowing mutual funds to invest up to 35% of their assets in sponsor group companies, aligning with the index they track. Previously, a 25% restriction posed challenges when the index had a higher weighting of sponsor group firms. This adjustment facilitates more accurate index replication while ensuring compliance with regulatory guidelines.

Conclusion: In conclusion, the increasing complexity and volume of transactions within the financial markets necessitate a collective effort between regulatory bodies like SEBI, stock exchanges, and market participants. By shifting responsibility onto fund houses to implement effective surveillance systems, SEBI aims to foster fairness and transparency.

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Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.