SEBI proposal to bring buying and selling of mutual fund schemes under insider trading regulation will bring in much-needed transparency, but may face legal challenges with most of the mutual fund (MF) schemes remaining unlisted with no real price discovery happening in real time.
SEBI, last week in a consultation paper, proposed bringing MF transactions under the purview of stringent insider-trading regulations to prevent abuse of sensitive information by key personnel in the MF industry.
Unlisted firms pose problem
Makarand Joshi, Founding Partner, MMJC and Associates – a corporate compliance firm, said covering unlisted MF units under Prohibition of Insider Trading Regulation where there is no price-discovery mechanism on the stock exchanges is like challenging the fundamentals of PIT Regulation.
Insider trading refers generally to buying or selling a security, in breach of a fiduciary duty on the basis of material, non-public information about a security.
Imposing PIT Regulation on a corporate or a high networth investor investing in MFs will lead to a lingering fear of them being dragged into investigation months after their decision to buy or sell the unlisted MF units, said a CEO of leading mutual fund house.
Tejas Khoday, Co-Founder and CEO, FYERS, said the regulation is the need of the hour after the recent events of fund managers taking undue advantage and making personal gains at the cost of retail investors’ money by accessing sensitive information.
To boost investors’ confidence
Such incidents not only impact the reputation of a particular fund house or a manager but adversely impact MF industry as a whole. SEBI already has stringent guidelines and mechanisms to address insider trading in listed companies and extending this to MF deals is a step in the right direction, he said.
The MF industry has seen wider acceptance in recent years and witnessed all-time high positive net flows in recent months. Proactive measures like these will further enhance the confidence among the investing community and ensure sustained participation, said Khoday.
Franklin MF fiasco
Akshat Garg, Manager – Research, Choice Wealth, said the Franklin Mutual Fund fiasco in 2020 and the current asymmetry at Axis Mutual Fund must be one of the vexations for SEBI to put people on the radar with material-sensitive information with regard to the MF scheme, in the interest of small retail investors
“AMCs will not be welcoming the step as it will add one more point to their checklist to comply. SEBI has to draw down the cost-benefit analysis of this proposal and make sure it does not add many intricacies to the function. It must invite various thesis from the concerned participants and should also prefer a sandbox passage before implementation,” he said.