Sebi includes mutual fund units in Insider Trading regulations

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Capital market regulator Securities and Exchange Board of India (Sebi) in its board meeting on September 30 decided to include mutual fund units in the SEBI (Prohibition of Insider Trading) Regulations, 2015.

On July 8, Sebi had issued a consultation paper with a proposal to include mutual fund units under the purview of insider trading regulations. The regulator doesn’t want those aware of unpublished price-sensitive information to unfairly exit a scheme.

Sebi’s decision stems from some instances it had observed in recent years when senior officials of a mutual fund house or part of the mutual fund industry eco-system had sold their units when they got a whiff of turbulence within the fund house.

Although the SEBI (Prohibition of Insider Trading) Regulations, 2015 prohibits fund managers and portfolio managers and senior executives of the fund industry to buy and sell when they have inside information, there was no bar on them to sell mutual fund units.

Further, SEBI’s code of conduct prevents MF officials from dealing in shares and bonds that their in-house schemes hold in their portfolios. Although it doesn’t have such restrictions for MF units, it stops employees from selling schemes in case certain events are likely to occur.

Also read | Skin-in-the-game rules where mutual fund officials must invest at least 20 percent of their salary in their own MF units

These events could be a change in the investment mandate or the conversion of an open-ended scheme into a close-ended one and vice versa. In October 2021, SEBI updated the circular to include the likelihood of restricting redemptions or winding them up. This revision happened post the crisis at a foreign fund house in 2020 where it was observed that some senior officials withdrew units in crisis time.

Other than the few conditions laid out in the code of conduct, fund managers and senior officials merely had to report that they had sold their MF units.

Now, Sebi has also included MF units in the insider trading guidelines.

A few months back when SEBI had issued the consultation paper proposing the inclusion of mutual fund units in the Insider Trading guidelines, it had included many people in the mutual fund industry eco-system who would be covered in these regulations. In simple words, people covered by the Insider Trading guidelines must adhere to the regulations and are barred from selling units in the face of any crisis a particular fund house- whose units they have- face. "We got industry feedback and studied it closely. We heard the feedback. And now we have retained a part of that eco-system in these regulations and we excluded others," says SEBI chairperson Madhabi Puri Buch when asked who would be covered and who would be excluded.

While agreeing with SEBI's move to include MF units in the insider trading regulations, Vikram Raghani, Senior Partner - Securities Law at JSA, a law firm says that SEBI will need to articulate the distinction between shares and MF units when drafting the regulation. "Insider trading in shares is entirely different from insider trading in units of mutual funds. Price sensitive information of underlying securities does not necessarily translate to price sensitive information which impacts the net asset value of units of a scheme. This nuanced yet critical distinction will have to be respected by SEBI and the courts in any enforcement action aimed at regulating insider trading in mutual funds. The proposal to segregate provisions pertaining to insider trading in units of a mutual fund from those pertaining to trading in shares will help ensure that there is no such overlap. It will be interesting to see how jurisprudence evolves in the context of enforcement actions arising out of alleged insider trading in mutual funds."

SEBI chairperson Madhabi Puri Buch said in the press conference that SEBI will issue the guidelines very soon.