The Securities & Exchange Board of India (SEBI) is making it mandatory for Asset Management Companies (AMCs) to have an institutional mechanism for deterrence of potential market abuse, including front-running.
Considering the recent front-running instances observed by the market regulator, the SEBI Board on Tuesday approved amendments to SEBI (Mutual Funds) Regulations, 1996 to enhance the existing regulatory framework by requiring Asset Management Companies (AMCs) to put in place a structured institutional mechanism for identification and deterrence of potential market abuse including front-running and fraudulent transactions in securities.
“The mechanism shall consist of enhanced surveillance systems, internal control procedures and escalation processes to identify, monitor and address specific types of misconduct including front running, insider trading and misuse of sensitive information,” SEBI announced after the board meeting.
The Board also approved amendments to the regulations to enhance responsibility and accountability of management of AMCs for such an institutional mechanism; and foster transparency by requiring AMCs to have a whistle blower mechanism.
“While SEBI will specify the broad framework of the institutional mechanism, the industry body i.e. Association of Mutual Funds in India (AMFI), in consultation with SEBI, shall specify detailed standards for such an institutional mechanism,” the market regulator said.
With respect to the requirement of recording of all communication by dealers and fund managers, the SEBI Board approved exemption from the requirement of recording face-to- face communication, including out of office interactions, during market hours.
This will be made effective after implementation of the institutional mechanism by the AMCs, SEBI said.
The market regulator has also decided to streamline prudential norms for passive schemes with respect to exposure to securities of group companies of the sponsor to facilitate a level playing field for mutual funds.
Currently, Mutual Fund schemes are not allowed to invest more than 25% of their net asset value (NAV) in group companies of the sponsor. This restricts the passive funds to effectively replicate the underlying index, in cases where group companies of sponsor comprise of more than 25% in the index, SEBI said.
This also puts such AMCs to a relative disadvantage as compared to other AMCs who may not have a sponsor group company(ies) comprising more than 25% in the underlying index, it added.
Accordingly, to streamline the aforesaid norm and create a level playing field for all AMCs, the Board approved amendment to SEBI (Mutual Funds) Regulations, 1996 to allow equity passive schemes, on indices to be specified by SEBI, to take exposure up to the weightage of the constituents in the underlying index.
This exposure would, however, be subject to an overall cap of 35% investment in the group companies of sponsor.
