Sebi has imposed stringent new rules forcing AMCs to bolster surveillance and internal controls. This move comes amid growing concerns over activities such as front-running and insider trading within the mutual fund industry. The aim is to create a level playing field while safeguarding investor interests.
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While industry experts applaud the intent, they also warn of potential unintended consequences.
Sebi mandates and their impact
Sebi issued a circular on Monday amending the Mutual Funds Regulations, requiring AMCs to establish an institutional mechanism.
“This mechanism shall consist of enhanced surveillance systems, internal control procedures, and escalation processes, enabling the identification, monitoring, and addressing of specific types of misconduct, including front running, insider trading, and misuse of sensitive information,” the circular states.
Feroze Azeez, deputy chief executive, Anand Rathi Wealth Ltd, said that this move by Sebi is intended to keep AMCs vigilant against unscrupulous activities. “AMCs must have systems in place to stop any potential market abuse, and the senior management of these AMCs are directly responsible for making sure these systems work well,” he said, adding that Sebi is attempting to make investment world safer for everyone involved.
“Stock exchanges, depositories, and Amfi (Association of Mutual Funds in India) is expected working together to share data, which helps keep this kind of scenario under check. Sebi’s regular reviews and updates show their dedication to keeping the market secure and trustworthy, boosting investor confidence,” he said.
Operational challenges and concerns
Experts acknowledge that while these measures might initially increase operational costs, they are expected to create a level playing field for all market participants in the long run.
The circular mandates that the chief executive officer (CEO) or managing director, along with the chief compliance officer of the AMC, will be responsible for implementing the mechanism. AMCs must establish an alert-based surveillance system, an escalation process, a whistleblower policy, and conduct periodic reviews.
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Ravi Prakash, associate partner at advisory firm Corporate Professionals, said that heightened personal liability for CEOs and compliance officers might deter qualified individuals from these roles due to the fear of repercussions from potential failures in detecting market abuses.
“Extensive surveillance raises privacy concerns, potentially affecting employee morale and increasing attrition. Stricter controls might reduce market liquidity and efficiency as AMCs adopt conservative trading strategies to avoid triggering alerts,” he said.
Prakash added that smaller AMCs with limited financial and human resources could struggle with resource allocation, leading to market consolidation with only larger players who can sustain the costs.
“Data sharing by stock exchanges and depositories with AMCs introduces risks related to data security and confidentiality. Whistleblower policies, while aiming to deter misconduct, risk misuse through frivolous or malicious complaints, resulting in unnecessary internal investigations and reputational damage to innocent parties,” he said.
Consultations and implementation timeline
Earlier this year, Sebi invited consultations from all relevant stakeholders, including the Mutual Funds’ Advisory Committee, to establish an institutional mechanism at the end of AMCs to proactively deal with instances of market abuse.
Following the Sebi quarterly board meeting in April, discussions were held with stakeholders, including the Amfi, to ensure smooth implementation of the institutional mechanism.
During these discussions, it emerged that certain large AMCs were open to implementing mechanisms before the approved timeline of six months.
“Additionally, Sebi is examining allegations regarding front-running of trades of an AMC, which merits consideration for expediting the implementation of the institutional mechanism at the end of AMCs,” minutes of the July board meeting of the regulator elaborated.
Accordingly, the Sebi board proposed that while AMCs with large assets under management, say, ₹10,000 crore and above, may be required to implement the institutional mechanism on a fast track; others may be given up to six months for implementation.
Arvind Ramesh, partner at Vritti Law Partners, noted that Sebi was aware that operational and procedural measures are time-consuming to implement. “Advancing implementation of the institutional mechanism was not something it had considered in isolation. However, the consequences for non-compliance with the circular were yet unknown,” he said.
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Kunal Sharma, partner at Singhania & Co., estimated that implementing the new framework could lead to higher operational expenses and disrupt existing workflows.
“Such a robust framework for deterring front running will give all market participants a fair chance to profit from legitimate market movements. This benefits both retail and institutional investors,” he said.