SEBI Strengthens Regulatory Framework For Mutual Funds To Prevent Insider Trading

Posted On - 27 November, 2024 • By - King Stubb & Kasiva

Introduction

On October 22, 2024, the Securities and Exchange Board of India (“SEBI”) issued a circular on the inclusion of Mutual Fund units in the SEBI (Prohibition of Insider Trading) Regulations, 2015.[1] This circular outlines new regulations aimed at strengthening the framework against insider trading in the mutual fund industry.

The circular highlights a key change implemented in November 2022, which included mutual fund units under the SEBI (Prohibition of Insider Trading) Regulations, 2015 (PIT Regulations).[2] These amendments became effective on November 1, 2024.[3]

To ensure smooth implementation, SEBI constituted a working group with representatives from Asset Management Companies (“AMCs”), the Association of Mutual Funds in India (“AMFI”), Stock Exchanges, Depositories, and Registrars to an Issue and Share Transfer Agent (“RTAs”). Their recommendations formed the basis for the decisions outlined in the circular.

Understanding the Circular

Disclosure and Reporting Obligations

  • Disclosure of Holdings (Regulation 5(E)(1)):
    • AMCs must disclose the aggregate holdings of Designated Persons (employees of AMCs, trustees, and their immediate relatives) on a quarterly basis, starting November 1, 2024.
    • Initial disclosure for holdings as of October 31, 2024, must be made on stock exchange platforms by November 15, 2024.
    • For subsequent quarters, disclosures must be submitted within 10 calendar days from the end of each quarter, as per the format in Annexure A.
  • Transaction Reporting (Regulation 5(E)(2)):
    • Transactions exceeding INR 15 Lakhs (single or aggregated across a quarter) by Designated Persons must be reported to the Compliance Officer within two business days.
    • This applies to transactions in all mutual fund schemes except exempted schemes.
  • Disclosure Format for Transactions (Regulations 5(E)(3) & 5(E)(4)): Transactions reported under Regulation 5(E)(2) must be disclosed in the format prescribed in Annexure B.
  • Violation Reporting: Any observed violations of the PIT Regulations must be disclosed in the format specified in Annexure C.

Harmonization with Mutual Fund Master Circular

  • Modification to Clause 6.6 of the Master Circular:
    • Investment and redemption of mutual fund units by AMC employees and trustees will now strictly follow the amended PIT Regulations.
    • Clause 6.6 of the Master Circular, which previously governed such transactions, has been aligned with the PIT Regulations.
  • Key Changes to Sub-clauses:
    • 6.6.2.1(a): Guidelines will now explicitly cover securities such as shares, debentures, bonds, warrants, and derivatives.
    • 6.6.2.1(b)(4): Includes investments in mutual fund schemes floated by the AMC employing the individual.
    • 6.6.2.3(f): Employees must avoid profiting from the purchase and sale (or vice versa) of any security within a 30-calendar-day period. Any exceptions require explanations to the Compliance Officer, who must report them to the AMC Board and Trustees.
    • Deletion of Clause 6.6.4: This clause has been removed to avoid overlap with the revised PIT Regulations.

Conclusion

This circular introduces a more stringent regulatory framework for mutual funds. The new disclosure norms for designated persons and stricter reporting requirements for large transactions aim to enhance transparency and deter insider trading. The alignment of the Master Circular with the PIT Regulations further strengthens oversight of employee transactions.

However, the effectiveness of these measures depends on rigorous implementation and enforcement. AMCs and trustees must adhere to the guidelines meticulously, while SEBI should actively monitor compliance. Additionally, the regulatory body may consider further refinements to the framework, such as expanding the scope of disclosure or incorporating advanced surveillance techniques. By taking a proactive approach, SEBI can safeguard investor interests and maintain the integrity of the mutual fund industry.

[1] https://www.sebi.gov.in/legal/circulars/oct-2024/inclusion-of-mutual-fund-units-in-the-sebi-prohibition-of-insider-trading-regulations-2015_87833.html.

[2] https://www.sebi.gov.in/legal/regulations/nov-2022/securities-and-exchange-board-of-india-prohibition-of-insider-trading-amendment-regulations-2022_65437.html

[3] https://www.sebi.gov.in/legal/gazette-notification/jul-2024/commencement-notification-of-the-securities-and-exchange-board-of-india-prohibition-of-insider-trading-amendment-regulations-2022_85228.html.