Capital market regulator Securities and Exchange Board of India (SEBI) has recommended an institutional mechanism like in Market Infrastructure Institutions and Qualified Stock Brokers for preventing market abuse and fraudulent transactions in asset management companies (AMCs).
The institutional mechanism assigns responsibility of particular work to a committee which, in turn, reports to the head of the institution.
SEBI has previously reported instances of front-running where broker-dealers, their employees, and connected entities were found to have engaged in front-running trades of asset management companies (AMCs).
Additionally, an employee of a listed insurance company was observed to be front-running the company’s trades, and an employee of a Foreign Portfolio Investor (FPI) was found to be front-running the FPI’s trades. In light of these occurrences, SEBI emphasises the need for an institutional mechanism within AMCs to prevent market abuse in securities associated with AMC transactions.
In a consultation paper issued on Saturday, SEBI sought investors’ opinion on proposal to set up adequate surveillance and internal control systems by AMCs for stopping fraudulent trades and ensuring appropriate escalation and reporting mechanism.
In order to keep the costs low, AMCs are permitted to share infrastructure and the procedure for this will be suggested by the Association of Mutual Funds in India (AMFI), in consultation with SEBI.
The regulator has proposed to make the Chief Executive Officer, Managing Director, Compliance Officer or other such analogous person of the AMCs responsible to ensure that an institutional mechanism is put in place to deter, detect and report possible misconduct by its employees, dealers, stock brokers or any other connected entities.
They will also be held accountable for non-compliance and negligence in implementing appropriate surveillance and internal control systems, it said.
All AMCs have to put in place a whistle blower policy as applicable to listed AMCs, which specifically addresses market abuse practices and also protect the whistle blower interest.