MC Exclusive: Sebi suspects front-running in Sandeep Tandon-owned Quant Mutual Fund; conducts search and seizure operations

It has been the fastest growing mutual fund in the country, with assets growing from Rs 100-odd crore in 2019 to more than Rs 90,000 crore currently.

The market regulator Sebi has conducted search and seizure operations on Sandeep Tandon-owned Quant Mutual Fund suspecting front-running as part of a probe into suspected front-running, three people familiar with the development said. The search and seizure operation was conducted across two locations – Mumbai and Hyderabad.

Apart from the Quant Mutual Fund’s Mumbai HQ, the other search location was a suspected beneficial ownership connection in Hyderabad, one source confirmed.

On Friday, Quant dealers and persons connected with the case were also questioned, sources confirmed.

Also read: MC Explains: What is Sebi's latest move to curb IPO price manipulation?

Quant Mutual Fund did not respond to queries sent to them on Friday. However, late Sunday evening, after the Moneycontrol story was published, the mutual fund sent out an email to its investors, confirming that it has received inquiries from Sebi.

The email said, "We want to assure you that quant Mutual Fund is a regulated entity, and we are always fully committed to cooperate with the regulator throughout any review. We will provide all necessary support and continue to furnish data to SEBI on a regular and as-needed basis."

An email sent to Sebi did not elicit any response.

Although two of the people cited confirmed that the case relates to front-running, the exact nature of the allegations could not be ascertained. One person said that the alleged profits from the transactions being probed by Sebi are close to Rs 20 crore. However, it is not clear if the management is under investigation in this case, or whether the probe relate only to external parties.

Quant Mutual Fund is founded by Sandeep Tandon. The fund got a mutual fund license from the Securities and Exchange Board of India (Sebi) in 2017. It has been the fastest growing mutual fund in the country, with assets growing from Rs 100-odd crore in 2019 to more than Rs 90,000 crore currently. It crossed assets of Rs 50,000 crore in January this year with a portfolio of 26 schemes and 54 lakh folios.

The fund’s performance has been stupendous thus far. Its small-cap fund manages more than Rs 20,000 crore currently. It has been the top performing fund in this segment over the past five and three year periods. Over the past five years, it delivered an annualised return of 45% compared to a category average of 31%. Over the past one year, the fund clocked a return of 69% as opposed to a 55% category average. Remarkably, in the month of May, 43% of total flows into small-cap fund category went into Quant Small-cap Fund, Moneycontrol earlier reported.

Sebi has been cracking down on mutual funds aggressively to eliminate front-running. More importantly, it has been upping its search and seizure operations to lay its hands on clinching evidence to crack complex maze of transactions that allow unscrupulous entities to easily escape because of the high burden of proof required by law.

Also read: Quant has received inquiries from Sebi: fund-house management confirms Moneycontrol newsbreak

Front-running refers to an illegal practice wherein fund managers/dealers/brokers aware of upcoming large trades put their own orders first so as to profit when the large order is executed and moves the stock. There are multiple ways of doing this depending who conducts the operation. One way is to purchase large blocks in trading accounts which is usually not in the name of the person buying,  before they are moved to the fund’s account, which results in higher acquisition prices for the publicly owned mutual fund. These transactions are difficult to trace as these are usually carried out through trading accounts that are obviously not in their own names.

Earlier, Sebi has barred Viresh Joshi, the fund manager of Axis Mutual Fund, and 20 entities linked to him in a front running case linked to the fund house. The regulator has identified ₹30.55 crore as ill¬-gotten gains made through the front¬running activities and directed that the amount be impounded.