SEBI proposes including MF units under insider trading

SEBI proposes including MF units under insider trading

Presently these are excluded from the application of the Prohibition of Insider Trading Rules

The Securities and Exchange Board of India (SEBI) plans to bring transactions in Mutual Fund (MF) units under the insider trading regulations. The move follows the 2020 Franklin Templeton episode that highlighted the need for tighter scrutiny.

The top executives at Franklin Templeton, including Vivek Kudva, the head of the Asia-Pacific distribution, and connected entities, had redeemed MF units worth Rs.56 crores in March-April 2020 before the asset manager shut six debt schemes for the redemptions on 23 April.

The market regulator viewed the actions as a breach of fiduciary duty, banning these individuals from the securities market and imposing a penalty in June 2021.

However, the officials challenged the order before the Securities Appellate Tribunal (SAT).

Meanwhile, SEBI's discussion paper stated, "It is being considered to include a separate chapter in Prohibition of Insider Trading (PIT) Regulations, specifically to cover the transactions in the units of MF schemes. A few key personnel had redeemed their holdings in the schemes while in possession of certain sensitive information not communicated to the unit holders."

"It is, therefore, felt to harmonize the provisions in PIT regulations to initiate serious enforcement actions against those who misuse the sensitive non-public information pertaining to MF schemes, directly or indirectly, to which they have access, by virtue of their fiduciary capacity," it added.

SEBI is known to have considered the proposal for over a year but wanted to strike the right balance between penalizing misconduct and making the regulations too onerous. The discussion had taken a harsh view of defining price-sensitive information and connected persons.

But Sandeep Parekh, the Managing Partner at FinSec Law Advisors, said, "The present proposals are very broadly worded, which will make trading or holding MF units onerous. Many fiduciaries do not trade shares to avoid attracting insider trading charges; rather, they hold MF units. Such a proposal will make investing in MF a problem for fiduciaries."

The discussion paper defines numerous points as price-sensitive, including changes in investment objectives, accounting policy, the liquidity position of the scheme and asset valuation, besides winding up schemes, restricting redemptions, creating a segregated portfolio and defaults in underlying securities.

Also, the definition of connected persons is similarly broad, covering auditors, rating agencies, legal advisers or consultants of the MF Schemes and Asset Management Companies (AMCs).

SEBI said, "Any person who is or has during the two months prior to the concerned act been associated with the MF, AMC and trustees, directly or indirectly, in any capacity including by reason of frequent communication with its officers or by being in any contractual, fiduciary or employment relationship or by being a director, officer or an employee, shall be deemed to be connected persons unless the contrary is established."