Internal fraud detection mechanism of mutual funds in advanced stages: SEBI

Internal mechanism to detect market frauds is in its final stages of preparation, said the SEBI chair.

The capital market regulator, Securities and Exchange Board of India (SEBI), said that the Rs 50 trillion Indian mutual funds (MF) are in advanced stages to setting up internal mechanism to detect market frauds like front-running, inside trading and so on.

"The MF industry (Association of Mutual Funds of India; AMFI, the MF industry's trade body) is in advanced stages to complete formulating the proposal. This is a complex process, hence it has taken time," said Madhabi Puri Buch, Chairperson, SEBI.

Buch said in the first phase, large fund houses would need to implement it first. She said that fund houses with size of Rs 10,000 crore and higher would need to implement this within three months after SEBI issues final guidelines. Other fund houses would need to implement within six months.

In April, SEBI had decided to modify the mutual fund regulations to make it mandatory to put in place a structured mechanism to identify potential market abuse like frontrunning, insider trading and so on.

Typically, when market abuses such as frontrunning are caught, SEBI, armed with data, statistics and trends, initiates and conducts inquiries that could point to a potential fraud.

However, over the past year SEBI has been of the view that fund houses must have internal systems — more than what they already have at the moment — to prevent and detect market manipulations. AMFI has been working on with the MF industry to arrive at a consensus on the internal mechanisms are to be set up. Once they submit their report to SEBI, it is expected that SEBI would issue final guidelines.