SEBI Watch: Right to apply insider trading rule on trades in MF units

11 Jul 2022

The Securities and Exchange Board of India is keen to extend the applicability of insider trading rules to transactions in mutual fund units. It has made this clear through a paper released last week for public consultation.

Applying insider trading norms to mutual fund units represents a paradigm shift in regulations.

It promises to the retail investor in a mutual fund scheme that critical unpublished information pertaining to the scheme is not exploited by insiders to his detriment.

The mutual fund industry was managing 35.6 trln rupees of assets as of Jun 30, of which around 88% were in actively-managed schemes and the rest in index funds, index exchange traded funds and fund of funds.

SEBI is likely make its big move through the detailed proposals laid down in the consultation paper.

If and when these proposals see the light of day then every time anyone who is an employee of an asset management company, its trustee and any person connected with them enters into a transaction in the units of the relevant schemes then he will be subject to the new, extended insider trading rules.

If he bought, redeemed, or switched units, or traded in them in any other permitted form, because he knew something about the scheme that was going to materially affect the NAV of the scheme or the functioning of the scheme then he would have violated the insider trading rules.

The six-schemes-shut-down episode of Franklin Templeton Mutual Fund two years ago had revealed major failures of fiduciary responsibility by a few senior officials and directors of the AMC and the trustee companies managing the mutual fund.

These executives and directors, including their family members, had personal investments in some of the six affected schemes but they exited prior to the shut-down announcement.

When the schemes got shut down the other investors were stuck.

The domestic mutual fund industry is a large industry. One can appreciate the complexities in day-to-day management of the funds but that must be no reason to get undemocratic.

The whole scenario gets unfair when AMC and trustee company officials and directors enter or exit their own investments in the schemes of their employers using information they are privy to in their official capacities.

These officials must not lose sight of their fiduciary role at any time, even during times of crises. They must know that they are in their respective positions to ensure optimal use of funds invested by each and every investor in their schemes.

When violations such as those in the Franklin Templeton MF case happen it also raises concerns of malafide intent.

SEBI is, therefore, right in getting the fund industry officials into the ambit of insider trading rules.

It must also consider applying the same standards on the alternative investment funds industry whose assets are growing steadily every year.

The disclosures standards for the alternative investment funds are nowhere near the same as that for mutual funds, and the insider trading rules, if applied to them, will serve as an important check on their fiduciary standards.