The Securities and Exchange Board of India (SEBI) approved amendments to SEBI (Mutual Funds) Regulations, 1996 to enhance the existing regulatory framework by mandating Asset Management Companies (AMCs) to execute a strong “institutional mechanism” to curb fraudulent practices like front-running and insider trading.
Note:
- SEBI has taken these decisions after encountering front-running practices in Axis AMC and Life Insurance Corporation.
- The decision was taken during the 205th meeting of the SEBI board held in Mumbai, Maharashtra.
Features of the Institutional Mechanism:
This Institutional mechanism will involve,
i.Use of technology and data analysis to detect trading activity for doubtful patterns.
ii. Implementing stricter internal policies to prevent misconduct by employees, dealers, and associated entities.
iii. Formulating clear guidelines for reporting and enquiring into suspected misconduct.
iv.The AMC Management according to SEBI will be held responsible for ensuring that the institutional mechanism works effectively.
v.AMCs are also required by SEBI to execute a system through which employees can anonymously report misconduct within the company.
Note: SEBI will specify the broad framework of the institutional mechanism and the Association of Mutual Funds in India (AMFI) will detail the standards for such an institutional mechanism.
Addressing challenges with recording:
i.SEBI Board has approved that the recording of face-to-face communication, including interactions outside the office during market hours, will be waived for dealers and fund managers.
ii.This will be executed only after the AMCs successfully implement the institutional mechanism.
iii.Previously, SEBI required recording all communication by dealers and fund managers. Concerns were raised about the burden on AMCs and the potential for employee departures.
What is Front Running?
i.Front Running is the illegal practice of using non-public information to trade securities, options, futures contracts, or other assets before the information becomes public.
ii.Brokers have access to information related to the orders of investors in advance. The illegal use of this information to trade to obtain profits is called Front running.
Increased investment flexibility for passive funds:
i.Currently, mutual fund schemes are not allowed to invest over 25% of their net asset value (NAV) in group companies of the sponsor.
ii.SEBI has raised the investment limit for Index Funds and Exchange-Traded Funds (ETFs) in companies belonging to the sponsor group from 25% to 35% of their total assets.
iii.This allows passive funds to better mimic the underlying index they track, especially if the index has a high weighting of sponsor group companies (more than 25%).
SEBI allows FPIs in GIFT City to take more investments from NRIs & OCIs
SEBI has allowed Foreign Portfolio Investors (FPIs) established in Gujarat International Finance Tec-City(GIFT City), Gujarat to accept unlimited investments from Non-Resident Indians (NRIs).
- A 100% contribution limit will be made available subject to the FPI submitting copies of Permanent Account Number (PAN) cards of all their NRI/OCI individual constituents, and their economic interest in the FPI.
Note:
i.Prior to this, NRIs and Overseas Citizens of India (OCIs) could invest only up to 50% in FPIs.
ii.At present, the combined holdings of NRIs and OCIs in a global fund must be less than 50% while that of a single NRI or OCI is capped at 50%.
iii.This will ensure that the NRI route is not used to circumvent rules such as the 25% minimum public shareholding requirement.
Other Amendments:
i.The SEBI Board has approved a proposal to allow the Venture Capital Funds (VCFs) to migrate to the Alternative Investment Fund Regulatory Framework due to the difficulties faced by VCFs registered under the legacy VCF regulations in fully liquidating their investment in the scheme during the said period. This migration will allow them to take advantage of the provisions on managing unliquidated investments in the AIF framework.
ii.On debt securities, the SEBI board approved a proposal wherein the issuers can issue non-convertible debentures (NCDs) and non-convertible redeemable preference shares (NCRPS) through the private placement mode at a reduced face value of Rs 10,000 along with the need to appoint a merchant banker.
About The Securities and Exchange Board of India (SEBI):
SEBI is a statutory body and a market regulator, that controls the securities market in India.
It was constituted as a non-statutory body on 12th April 1988 and was established as a statutory body in 1992.
Chairperson– Madhabi Puri Buch
Headquarters– Mumbai, Maharashtra
