The Securities and Exchange Board of India (Sebi) has probably been pressured to accelerate the construction of an institutional mechanism framework intended to prevent such market abuses in light of the potential front running incidents at Quant Mutual Fund.
The Sebi board adopted this framework in April, and it was supposed to go into force six months after it was announced. However, recent events have accelerated the pace of regulation.
The regulator presented a new “glide path” during the June board meeting, which calls for large asset management companies (AMCs) to be pushed towards the quick adoption of the new framework. The newly made available agenda materials from the board meeting disclosed this development.
According to Sebi’s materials, “some sizable AMCs are willing to put the institutional mechanism into place ahead of the six-month timeframe that has been approved.” In order to expedite the institutional mechanism’s implementation after the end of AMCs, the regulator is presently “examining allegations regarding front-running of trades of an AMC.”
On June 27, almost a week after the regulator conducted a search and seizure operation at Quant Mutual Fund’s location in response to front-running suspicions, Sebi held its board meeting. The seriousness of the allegations was highlighted last week when the fund house stated that the Sebi investigation was “a court-approved search and seizure operation.”
Informants with knowledge of the situation said that front-running accusations at one of the industry’s major players, Quant Mutual Fund, pushed Sebi to brief its board on the urgency of expediting the framework’s adoption. According to the sources, most major fund firms responded in a positive way.
Amidst the mutual fund industry’s rapid expansion—assets under management (AUM) have doubled since early 2021, and the number of investors has more than doubled from less than 21 million in March 2020 to over 46 million—the regulator has stepped up its oversight of the sector.
The new system, about which no notice has yet been given, intends to create standardised monitoring and internal control protocols within AMCs in order to spot misbehaviour and the improper use of private data, such front-running. It also gives AMC management more responsibility.
The mechanism in question will utilise the standard operating procedure (SOP) that was developed by the Association of Mutual Funds in India (Amfi), an industry body. It’s unclear, though, if Amfi has already sent Sebi the SOP. Amfi promised in early May that the SOP would be available in a month, but as of the time of publication, Amfi had not responded to any of the inquiries.
Although different fund houses now use different monitoring techniques, all fund managers and dealers must record all communications during market hours in accordance with Sebi regulations. After AMCs implement the new framework, the regulator intends to loosen this requirement.
A circular issued by Sebi earlier this month requires stock brokers to set up an institutional structure for preventing and detecting market abuse and fraud. This entails, among other things, taking steps like putting internal controls and surveillance systems in place for trading activities in addition to introducing whistleblower policies.
Reducing abuse of the market
MF legislation do not yet require the use of a formal institutional mechanism.
Market manipulation is frequently attributed to “rogue employees” rather than AMCs.
AMCs are required by the new mechanism to install a system to detect and discourage market abuse, such as front-running.
> It will have improved internal controls, escalation procedures, and surveillance.
Additionally, it requires a vigilance system and a policy for whistleblowers.
Global frameworks employ a combination of rules and principles.
Such organised frameworks have been implemented by Singapore and the EU.