Starting November 1, insiders at mutual fund companies, including asset management company (AMC) executives, trustees and their immediate family members, will be subject to the same strict rules governing the operations with listed securities.
This is the first time that mutual funds will be regulated under insider trading rules, ensuring that those with access to sensitive information do not gain an unfair advantage.
Key features of the new regulation
Sebi’s updated regulatory framework for mutual funds, under the Prohibition of Insider Trading (PIT) Regulations, 2015, introduces several important provisions aimed at improving transparency.
Firstly, AMCs, trustees and nominees are now required to disclose their mutual fund holdings on a quarterly basis. These disclosures will begin with holdings as of October 31 and must be submitted by November 15, 2024. Subsequent disclosures are required within 10 calendar days of the close of each quarter.
Additionally, any transaction involving mutual fund units that exceed $15 lakh in a calendar quarter must be reported to the AMC compliance officer within two working days. This applies to transactions carried out by designated persons, trustees and their immediate family members, with a focus on greater scrutiny of large transactions to avoid potential insider trading.
Additionally, insiders are prohibited from profiting from buying and selling mutual fund units within a 30-day period. If such transactions occur, a detailed explanation must be provided to the compliance officer, who will report the transaction to the board of directors. These measures reflect Sebi’s commitment to ensuring transparency and protecting investors from potential misuse of non-public information.
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Global Influence: Best Practices from the US and UK
The new Sebi regulations have drawn significant influence from global best practices, particularly from the US and UK, aligning Indian mutual fund regulations with those of major financial markets.
In the United States, the Securities and Exchange Commission (SEC) enforces insider trading regulations through Rule 10b5-1, which allows insiders to establish prearranged trading plans when they are not in possession of unauthorized information. public.
This rule ensures that insiders can make legitimate transactions without violating insider trading regulations. The regulator has introduced a similar mechanism, which allows mutual fund members to carry out pre-declared transactions, minimizing the risk of insider trading. The SEC also mandates timely disclosure of inside information within two business days by filing Form 4. Sebi regulations reflect this requirement, requiring that mutual fund transactions exceeding $15 lakh will be reported within the same timeframe, thereby ensuring transparency and accountability.
In the UK, the Market Abuse Regulation (MAR), enforced by the Financial Conduct Authority (FCA), provides a comprehensive framework to prevent insider trading and market abuse. Sebi’s new regulations closely align with this model, particularly in terms of quarterly disclosure and compliance mechanisms. This alignment helps ensure that insiders do not misuse inside information for personal gain and that investors have access to timely information.
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Strengthen compliance and monitoring
To enforce the new regulations, Sebi has directed all AMCs to put in place a robust compliance mechanism to detect and prevent insider trading, front-running and other market abuses. This includes enhanced surveillance systems, stricter internal controls, and regular audits to monitor potential violations. These systems will help AMCs identify suspicious activities and take corrective action, ensuring better oversight. The Association of Mutual Funds of India (Amfi), in collaboration with Sebi, will play a key role in developing detailed guidelines for consistent implementation of these standards across the industry. This will help ensure that all AMCs follow a uniform set of compliance practices, reducing regulatory gaps and limiting opportunities for market abuse.
These regulations mark a significant shift toward greater transparency, better monitoring, and stricter enforcement.
This development is a welcome step for investors. As the mutual fund industry becomes subject to stricter regulation, it provides a safer and more reliable environment for the investor.
Simarjeet Singh is an assistant professor at Great Lakes Institute of Management, Gurgaon. Hardeep Singh Mundi is an assistant professor at IMT, Ghaziabad. Opinions are personal.
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