Possible instances of front running at Quant Mutual Fund have triggered the fast tracking of implementing the so-called institutional mechanism framework, aimed at curbing market abuse like front running and fraudulent transactions.
The framework, approved by the Sebi board in April, was to come into effect six months after its notification.
However, at its June board meeting, the regulator proposed a glide path, wherein large asset management companies (AMCs) will be nudged to fast track the implementation.
This development was not part of the board meeting announcement and has come to light after Sebi released the agenda papers for the June board meeting.
“Certain large AMCs are open to implement the institutional mechanism before the approved timeline of six months,” the market regulator has said in the agenda papers. “Sebi is examining allegations regarding front-running of trades of an AMC, which merits consideration for expediting the implementation of the institutional mechanism at the end of AMCs,” it added.
The board meeting was held on June 27, almost a week after Sebi conducted searches at Quant Mutual Fund’s premises over allegations of front running. Last week, the asset manager confirmed that the Sebi enquiry was not a regular exercise but “a court-approved search and seizure operation”.
People in the know said with the surfacing of front running allegations at the popular fund house, Sebi decided to apprise its board on the implementation of the framework and decided to nudge large fund houses to fast track its implementation. Most large fund houses were on board with the idea, sources added.
The regulator has increased vigil on the industry, which has started to draw large sums of money from households in recent years. While assets under management (AUM) of the industry have doubled since early 2021, the investor count has also more than doubled from less than 21 million in March 2020 to over 46 million.
The mechanism—which is yet to be notified by the regulator—is aimed at putting in place uniform surveillance and internal control procedures at AMCs to identify instances of misconduct and misuse of sensitive information, like front running. Under the framework, the regulator will also put more onus and accountability on the management of AMCs in such instances.
The framework will be based on the standard operating procedure (SOP) formulated by the Association of Mutual Funds in India (Amfi), an industry body.
It is not known if the industry body has sent the SOP to Sebi. In early May, it had stated the SOP would be ready in a month. Queries sent to Amfi did not elicit any response till the time of going to the press.
At present, the surveillance mechanism differs from one fund house to another. One common practice is recording all communications by fund managers and dealers during market hours, which is mandated by Sebi. The regulator plans to relax the norm after AMCs implement the new framework.
Earlier this month, Sebi issued a circular mandating stock brokers to establish an institutional mechanism for the prevention and detection of fraud or market abuse. It includes measures like implementing systems for the surveillance of trading activities and internal controls, and introducing a whistle-blower policy, among other obligations.
First Published: Jul 16 2024 | 7:37 PM IST
