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The Securities and Exchange Board of India (Sebi) has proposed to include trading in mutual fund units under insider trading rules. The proposal, though well-intentioned, has worried many in the industry. Mint explains.

What is the regulator proposing?

Insider trading is the trading of securities while in possession of price-sensitive information that is unavailable to the broader market. The Sebi discussion paper proposes to add a new chapter to the prevention of insider trading (PIT) laws that would define unpublished price sensitive information (UPSI). The proposals are widely defined, covering a large number of scenarios. Sebi also plans to tweak applicability of insider trading provisions in relation to pooled investment vehicles such as alternative investment funds, real estate investment trust, etc. Sebi has invited comments till 29 July.

What and who all are covered?

The Sebi paper names a long list of events that will be considered as price-sensitive, including changes in investment objectives, and accounting policy, besides winding-up schemes and defaults in underlying securities. An insider would include connected persons or someone who has access to UPSI, including board of directors, sponsors, associate companies, holding companies, immediate relatives, fund accountants, officials of the Association of Mutual Funds in India, auditors, legal advisers, consultants, employee of rating agencies, bankers to the fund house and stock exchange officials.

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What prompted the regulator’s action?

Apparently the Registrar and Transfer Agent (RTA) of a mutual fund, privy to certain sensitive information about a scheme, had redeemed all its units. In the Franklin Templeton case, a few key executives withdrew almost 56 crore in March and April 2020, before the fund house shut six debt schemes for redemptions.

Why does this worry the industry?

Many officials connected with the financial ecosystem who act in a fiduciary capacity avoid trading in stocks for fear of insider trading laws, choosing mutual funds instead. Including MFs in insider trading will make such investments equally unattractive. The language suggested is quite broad, and many feel the approach is onerous. “The problem of enforcement may not be fully solvable through change in policy," said Sumit Agarwal, founding partner, Regstreet Law Advisors.

Do MFs need separate insider trading rules?

The industry does not believe there is a need for insider trading laws in mutual funds, as the possibility of such malpractice is low since funds pool investments in equity and debt of companies. Sebi already has provisions under mutual fund regulations and prevention of fraud and unfair trade practices (PFUTP) rules. Fund houses already have some internal checks to prevent such practices. AMCs say measures should be more about disclosures and taking necessary clearances from compliance officers.

 

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