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No WFH for financial intermediaries: SEBI plans directive to improve surveillance

The Securities and Exchange Board of India (Sebi) is planning to ask financial intermediaries to bring their full strength of employees back to office. The pandemic-forced work from home, it is felt, has impacted surveillance measures that were put in place to check insider trading and front-running.

The matter got urgency after two fund houses found themselves in the middle of a front-running storm in less than a week.

The Securities and Exchange Board of India (Sebi) is planning to ask financial intermediaries to bring their full strength of employees back to office. The pandemic-forced work from home, it is felt, has impacted surveillance measures that were put in place to check insider trading and front-running.

The matter got urgency after two fund houses found themselves in the middle of a front-running storm in less than a week.

The market regulator has been tightening compliance norms for mutual funds over the last few years. In October 2020, Sebi came out with a diktat that all those involved in investment decisions should mandatorily have all their calls recorded during market hours. This measure has lost some of its impact as work from home became the norm during the pandemic.

The asset management industry had strongly protested when Sebi announced its decision to enforce the call recording rules. With two mutual fund houses facing charges of front-running, the industry may not be able to hide behind the garb of privacy on this rule, it is felt.

While industry experts say that front-running is very common in most dealing rooms, it is hard to establish as employees have become smarter and now don’t use accounts of friends and families. Given that demat accounts are available on hire for such front-running activities, Sebi has found a way to crack down even on these seemingly unrelated entities.

People in the know say that Sebi has deployed sophisticated technology tools and algorithms that can help it identify patterns to establish front-running, even if the parties are distinctly unrelated.

The markets regulator is in no mood to let these instances pass without exemplary punishment.

Last week Axis Mutual Fund said it had suspended two fund managers — Viresh Joshi and Deepak Agarwal — for irregularities which could include front-running. The fund house has conducted suo moto investigation, after one of the fund managers was spotted driving a limited edition Lamborghini.

Front-running is when a person, mainly a broker or an advisor, takes a buy or sell position in any stock based on exclusive knowledge that the recommendations being issued by them will certainly lead to price variation in the particular stock in the near future.

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