SEBI introduces new rules for AMCs to combat front running, frauds

The SEBI (Securities and Exchange Board of India) has introduced an 'institutional mechanism' to combat fraudulent transactions at asset management companies (AMCs), according to a circular issued on August 5. This initiative targets misconducts such as front-running, insider trading, and misuse of sensitive information. The responsibility for implementing these deterrence measures falls on the CEO, managing director, and Chief Compliance Officer of each AMC, says SEBI.

To support the effectiveness of the institutional mechanism, SEBI has instructed stock exchanges and depositories to collaborate with Association of Mutual Funds in India (AMFI) to develop data sharing systems for mutual funds. AMCs are also required to enhance surveillance systems, internal controls, and procedures to detect and address misconduct. “AMCs shall report all examined alerts to SEBI along with action taken, in the Compliance Test Report (CTR’) and the Half-yearly Trustee Report (‘HYTR’) submitted to SEBI,” the capital market regulator states.

SEBI stated that during the processing of alerts, AMCs are expected to review all recorded communications, such as chats, emails, access logs from the dealing room, and CCTV footage if available.

SEBI noted that AMCs are required to develop written policies and procedures for examining and addressing potential market abuse, including front-running and fraudulent transactions involving their employees and associated entities, with these policies requiring board approval. Any suspected market abuse should be met with strict actions, including suspension or termination of such persons. Additionally, an alert system must be set up to automatically detect suspicious activities, with AMCs required to record and report these alerts and their responses.

AMCs are also tasked with drafting an escalation policy to notify the board about potential market abuse instances and examination results. SEBI has amended mutual fund norms to require AMCs to establish and maintain a documented whistle-blower policy, in line with the latest guidelines, to ensure the protection of whistleblowers and address fraudulent or unethical practices.

Following some front-running cases in AMCs, SEBI had issued a consultation paper in May 2023. This decision was made months after the capital markets regulator banned 21 entities, including Viresh Joshi, the former Axis Mutual Fund manager, in connection with a front-running case in March 2023. Many of the resulting recommendations have now been adopted. Additionally, mutual fund unit trading will be included in SEBI's Prohibition of Insider Trading regulations.

Recently, seven new regulatory measures have been proposed by SEBI in a consultation paper released in the last week of July. These measures are designed to safeguard small retail investors and enhance stability in the derivatives market, supporting ongoing capital formation. The stricter derivatives rules involve raising minimum contract sizes by up to four times, requiring upfront collection of options premiums, and reducing the number of weekly contracts.