SEBI's Latest Insider Trading Regulations: What It Means For Mutual Funds

The Securities Exchange Board of India has moved to impose tighter mandates pertaining to insider trading in mutual funds, that will come into effect from November this year.

This is along the lines of proposals made in a consultation paper in July 2022, which called for the tightening these regulation, with instances where mutual fund house employees moved their units after sensing trouble, before investors were made aware.

Here's what will come to effect under the new regulations.

The previous regulation had only prevented insiders from trading stocks and bonds. The new mandate will also prevent moving personal mutual fund units.

Senior employees of mutual fund houses, who have access to insider information, will not be allowed to sell their own holdings based on an anticipated fall in the net asset value of the asset management company or a particular scheme.

An insider moving their funds out, ahead of an anticipated dip in value based on unpublished information, will now be addressed under the new regulations. Employees cannot use information that investors have not been informed of yet, to move their own personal units.

In cases of unprecedented crisis like Franklin Templeton or BOI-AXA there were allegations of serious misuse of insider information by senior employees.

In cases like this, senior employees have actionable information before it is released to the public. Employees have used this to avoid losses that investors would have incurred.

“When it comes to mutual funds, there are certain actions that can be taken based on insider information. They (employees) know their holding and stake so they can sell their units first before taking actions that investors do not anticipate. In the Templeton case, the senior executives had their own holdings removed before the closing," said Harshvardhan Roongta, co-founder of Roongta Securities Pvt.

An insider is any employee of the company who has access to information that could be price sensitive that has not been made public yet.

This title is now not limited to senior employees, but also applied to any employee who has information that might have a direct impact on price and value of a scheme or the firm in the future.

Employees who fall under the definition include directors, bankers of asset management companies, employees of the auditor, legal advisor, or consultant of the AMC along with a few others.

The regulations will also come with difficulties in implementation.

“This is a measure in the right direction but very difficult to implement in the right spirit. If an employee has a genuine reason to withdraw money, and an event happened post that, then the redemption is hard to explain,” said Mohit Gang, founder and chief executive officer of Moneyfront.

There can be necessary redemptions that employees need that could now be hounded under the new regulations, he said. According to the system in place, employees are already required to report actions pertaining to their holdings.

“For employees, 20% of their salary should be invested back into their own company's schemes and that means that their major holdings might be in their own AMC. The regulation leaves very little leeway to the employees to sell their holding in case of a genuine need,” said Gang.

The regulations were already highly restrictive as the avenues for investment for employees were already limited, he said.