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Insider trading norms may hit mutual fund staff’s investment options

The Association of Mutual Funds in India (Amfi) is in the process of collating feedback from individual mutual fund houses on the issue and may suggest changes to make the process of implementing the proposals smoother, said people in the know. A text and a phone call to a senior Amfi official did not get a response.

"The personal investment of those in the mutual fund industry is already severely curtailed. Over time, employees may stop investing in their own funds beyond the mandatory 20% requirement considering the risks involved," said a senior fund official.
"The personal investment of those in the mutual fund industry is already severely curtailed. Over time, employees may stop investing in their own funds beyond the mandatory 20% requirement considering the risks involved," said a senior fund official.

By Ashley Coutinho

The Securities and Exchange Board of India’s (Sebi) draft proposals to bring transactions in mutual fund units under the ambit of insider trading norms may curtail the investment options for mutual fund employees even further.

MF employees prefer to invest in mutual fund units given the restrictions on direct investments in stocks that are held in the fund house’s portfolio. Last year, the regulator made it mandatory for MF personnel to invest 20% of their take-home pay in schemes they manage or schemes from their own fund house. This was to ensure that the fund employees had enough skin in the game. Several senior officials, however, invest a sizeable amount over and above this mandatory requirement.

The new norms may compel these officials to cut down on the additional investment, and park that money in schemes of other MFs or look for other investment avenues.

“The personal investment of those in the mutual fund industry is already severely curtailed. Over time, employees may stop investing in their own funds beyond the mandatory 20% requirement considering the risks involved,” said a senior fund official.

According to him, the new norms may impede redemptions by an employee at the time of an emergency if additional compliance restrictions are in place due to an adverse event such as a pandemic or a recession.

“You never know what action the regulator will take even if there is an inadvertent violation of these norms. The clawback clause on the 20% salary could be enforced. If there are instances of misuse of information, it is better to tackle those cases, rather than subjecting the entire industry to so much of compliance burden,” he said. Debt fund managers could become more wary of investing in schemes with higher credit or liquidity risk, and the overall risk-taking in debt schemes could reduce as redemptions will come under greater scrutiny, said fund officials.

The regulator, in its proposals, has cited the example of a few key personnel of a fund house that were found to have redeemed their holdings in the schemes ahead of an adverse liquidity event while in possession of certain sensitive information that was not communicated to the unit holders of the schemes.

The Association of Mutual Funds in India (Amfi) is in the process of collating feedback from individual mutual fund houses on the issue and may suggest changes to make the process of implementing the proposals smoother, said people in the know. A text and a phone call to a senior Amfi official did not get a response.

Insider trading refers to buying or selling a security, in breach of a fiduciary duty or other relationship of trust and confidence, on the basis of material, non-public information about the security. As it stands, the units of mutual funds are specifically excluded from the purview of current insider trading regulations.

Last year, the regulator had introduced certain provisions, stating that employees, board members and trustees of AMCs should not transact in any MF scheme, while in possession of certain sensitive information which was not communicated to the unit holders of the schemes and which could materially impact the NAV or interest of unit holders.

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