Insider trading regulations to be applicable to mutual funds

Two specific cases triggered the market regulator to include mutual funds under PIT regulations

Insider trading regulations to be applicable to mutual funds

The Securities and Exchange Board of India (SEBI) on Friday, Sep 30, 2022, in its board meeting, included units of mutual funds in the Prohibition of Insider Trading (PIT) regulations. This essentially means that penal action can be taken against the officials of the fund house who use unpublished price-sensitive information (UPSI) pertaining to mutual funds, which is not yet publicly available to the unit holders.

The current PIT regulations are applicable to dealing in securities of listed companies or proposed to be listed, when in possession of UPSI. The definition of insider means any connected person or person having access to UPSI.

However, the units of mutual funds are specifically excluded from the definition of securities under PIT regulations. Basically, an insider means who is a connected person or has possession of UPSI pertaining to the mutual fund schemes. The consultation paper released by the SEBI in July this year stated that any person who is or has, during the two months prior to the concerned act, been associated with the mutual fund, AMC and trustees, directly or indirectly, would be a connected person.

Till now, there was no need to include mutual funds in PIT regulations as dealing in UPSI might not materially impact the net asset value (NAV) of the scheme. However, in this issue, two specific cases triggered the market regulator to come out with the consultation paper.

In the first case, the Registrar and Transfer Agent (RTA) of a mutual fund had redeemed the units after being privy to certain sensitive information which was not yet communicated to the unitholders. In another case, a few key personnel of the fund house were found to have removed the money, while possessing sensitive information which was not communicated to the unit holders of the schemes.

In the past few years, SEBI has announced various measures to align the interest of the investors. The most recent one was the 'skin in the game' circular, where SEBI mandated 20 per cent of the salary of the designated employees to be paid in the form of a unit of mutual funds. All these steps could further cement the trust of investors in the Rs 37 trillion Indian mutual fund industry.

To further enhance the interest of the investors in mutual funds, SEBI, in its board meet, also proposed to facilitate faster payout of redemption and dividend to unitholders by AMCs from existing 10 working days and 15 days respectively to 3 working days and 7 working days.

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