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Illustration: Binay Sinha
The Securities and Exchange Board of India (Sebi) has notified the much-awaited institutional mechanism for mutual funds—a framework to prevent fraudulent transactions, front-running, and other such violations.
The mechanism will be made effective within three months for bigger players, while smaller fund houses will get a six-month window for implementation.
Sebi has specified that asset management companies (AMCs) with assets under management (AUM) under Rs 10,000 crore will have to adhere to the new mechanism after six months.
“The chief executive officer or managing director or such other person of equivalent or analogous rank and chief compliance officer of the asset management company shall be responsible and accountable for the implementation of such an institutional mechanism for deterrence of potential market abuse, including front-running and fraudulent transactions in securities,” said Sebi, while amending the mutual fund regulations on August 2.
The market regulator had first approved the mechanism in its board meeting in April. The move follows instances of front-running in mutual funds by dealers and brokers.
For this mechanism, the Association of Mutual Funds in India (Amfi) is formulating a standard operating framework. At present, the mutual funds follow internal practices on surveillance, which vary across firms.
“While we wait for the SOP, we have already strengthened our internal surveillance systems and are following stringent measures to keep any such possible abuse in check,” said the head of a leading fund house.
Sebi has also directed fund houses to provide for a confidential channel, also called a whistle-blower policy, for employees, directors, trustees, and others to raise concerns on suspected fraudulent, governance concerns, or unethical practices.
Further, the market regulator will also relax the mandate for mutual funds to record face-to-face communication, including out-of-office interactions. However, this relaxation will be made effective after a year. Currently, the fund houses record all fund manager and dealer communications during market hours.
Last month, the market regulator also mandated stock brokers to establish an institutional mechanism for fraud prevention and detection or market abuse. This includes measures such as the implementation of trading activity surveillance systems and internal controls, and the introduction of whistle-blower policies, among other obligations.
First Published: Aug 05 2024 | 5:52 PM IST
