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A year after market regulator brought mutual funds under the ambit of insider trading regulations, the norms are yet to get enforced.
There are operational hurdles in setting up common industry standards, even as the Association of Mutual Funds in India has held several talks with SEBI on the matter, said two people in the know. There could be issues at the exchange’s end as well.
The SEBI issued a consultation paper on applicability of its PIT Regulations 2015 to MF units in July last year. In November, a notification brought within its fold all types of mutual funds, whether listed or unlisted, with exemptions for exchange-traded funds and systematic investment plans.
“Practically, the rules have not been enforced and are still not effective. The industry has held talks with the regulator on the practical challenges,” said a senior MF official.
“Rules have been laid down in a hurry without thinking through operational indiosyncracies. For instance, each MF scheme could hold multiple ISINs, which could pose a challenge,” added another senior official.
Digital database
Under the new norms, AMCs and fiduciaries who do business with them are required to maintain a structured digital database, which is a master roster that tracks each instance of UPSI shared within and outside the asset management company.
“This is uncharted territory for AMCs as new processes would be required to be impelemented to capture the data and include outside persons who may be aware of such information such as auditors and valuers. With preclearance of transactions in MF units required for employees, new issues could emerge as there is no precedence to rely on as to what would constitute UPSI which may affect the net asset value of MF schemes,” said Anil Choudhary, Partner, Finsec Law Advisors.
Speculation is rife that the norms may be made effective from January or April next year, with another three to six months for implementation.
“The understanding is that SEBI has to greenlight this by way of another notification. In my view that is not correct. A common digital database was to be set up and the format was agreed upon. The exchanges were supposed to create a reporting framework. The delay is uncalled for. Despite niggling operational issues, the norms should have been made effective within three months,” said another MF official.
An email sent to SEBI and the exchanges did not immediately get a response. A text message sent to an AMFI official remained unanswered.
Lessons learnt from FT episode
Some industry experts maintain that there is no need for separate regulations under PIT as the SEBI master circular for mutual funds already prohibits employees and directors from trading in MF units when in possession of UPSI.
“The new norms are an overkill. While employees of AMCs are mandatorily required to invest in MF units of their AMCs, restrictions are now being placed on employees for sale of these units. In the past 30 years, there have been at most 2-3 instances of front running found by SEBI,” said Choudhary.
SEBI’s decision to bring MFs within the insider trading ambit follows the Franklin Templeton episode, in which a few fund officials were accused of redeeming holdings in schemes that were about to be wound down.
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