SEBI mulls changes in insider trading norms to include dealing in mutual fund units

The market regulator Securities and Exchange Board of India (SEBI) issued a consultation paper on July 8, to include dealing in mutual fund units under the Prohibition of Insider Trading Regulations.

This essentially means that if a fund manager or any other senior fund house official knows of any price sensitive information that could impact any schemes’ net asset value (NAV), then they cannot sell the MF units.

The regulator, in its consultation paper, pointed out two incidents without getting into specifics as reasons for these changes.

In one case, it says it observed that a Registrar and Transfer Agent (RTA) of a mutual fund had redeemed all its units from a scheme, being privy to certain sensitive information pertaining to the scheme of a mutual fund, which was not yet communicated to the unitholders of a particular scheme.

In other incident, it says a few key personnel of a mutual fund were found to have redeemed their holdings in the schemes, while in possession of certain sensitive information not communicated to the unit holders of the schemes.

SEBI appears to be referring to the Franklin Templeton Mutual Fund's wind-up episode that unfolded in the year of 2020.

Last year, SEBI in its order in the Franklin Templeton wind-up case had held Vivek Kudva (Director at Franklin Templeton) and his wife Roopa Kudva in violation of regulations for redeeming their investments in the six wound-up schemes before these schemes were finally closed for regular investor withdrawals. SEBI’s order had stated that Kudva in his capacity as director of FT MF, had an advantage over other investors as he was in possession of non-public information. To be sure, the Kudvas later appealed against SEBI’s order in Securities Appellate Tribunal (SAT), with SAT yet to give its final judgment.

SEBI said while it has made necessary changes through a circular in October last year to stop key personnel of a mutual fund from transacting in MF units while being in possession of certain sensitive information of the fund house, it was important to make necessary changes in Prohibition of Insider Trading Regulations.

“…the units of mutual funds are specifically excluded from the purview of PIT Regulations. A need has, therefore, been felt to harmonise the provisions in PIT Regulations to initiate serious enforcement actions against those who misuse the sensitive non-public information pertaining to scheme of Mutual fund, directly or indirectly, which they have access, by virtue of their fiduciary capacity,” the consultation paper read.

What is price-sensitive information? The consultation paper said in the case of mutual funds, unpublished price-sensitive information (UPSI) can be defined as “any information pertaining to a scheme of a mutual fund which is not yet generally available and which could materially impact the Net Asset Value or materially affect the interest of unit holders.”

Such information can be a change in the investment objectives of the scheme, a change in the accounting policy, a material change in the valuation of any asset, or class of assets, conversion of a close-ended scheme to an open-ended scheme or an open-ended scheme to a close-ended scheme, restrictions on redemptions, winding up of a scheme, creation of a segregated portfolio, material change in the liquidity position of the mutual fund scheme, default in the underlying securities which is material to the mutual fund, etc.

Not just key employees The consultation paper might not go down well with mutual fund industry officials as SEBI has prooosed to bring in a wide ambit of people, connected with fund houses, under the Insider Trading guidelines. SEBI has proposed that in addition to the key employees of the fund house who might be in possession of price-sensitive information, employees of the Association of Mutual Funds of India (AMFI; the mutual funds’ industry trade body), employees of stock exchange or distributor platforms associated with the fund house, the MF’s auditor, its legal advisor, employees of the credit rating agency who is touch with the fund house and even a banker of the fund house, could be barred from selling MF units if they appear to know the fund house affairs. The condition here being, any of these persons being in touch with the fund house within two months’ prior to the event having being occurred at the fund house and may have had access to the unpublished price sensitive information.

 SEBI has also proposed to put the onus on these people to prove their innocence, if they are found to be connected with the fund house but not had any unpublished price sensitive information.