SEBI to bring changes in insider trading norms to deal with mutual fund units

SEBI is mulling over bringing in changes in insider trading rules to deal more efficiently with mutual funds. A paper issued by the financial authority stated that if a fund manager or any other official has knowledge that could change the scheme’s net asset value (NAV), they cannot sell the mutual fund units. 

The paper cited two situations which became the reason behind the possible change. In the first incident, a Registrar and Transfer Agent (RTA) of a mutual fund retrieved all the units of a scheme whilst knowing sensitive information that could impact the mutual fund NAV. The unitholders of the scheme were unaware of the sensitive information. In the second incident, a few officials redeemed their holdings in a scheme privy to information that would affect the NAV – referring to the Franklin Templeton case in 2020. 

While a circular was issued last year to stop a few key personnel from redeeming mutual fund units of a particular scheme, SEBI feels there’s a strong need to bring changes to insider trading norms to stop the exploitation of mutual fund schemes. The paper read, “The units of mutual funds are specifically excluded from the purview of PIT Regulations. A need has been felt to harmonise the provisions in PIT Regulations to initiate serious enforcement actions against those who misuse the sensitive non-public information about the scheme of Mutual funds, directly or indirectly, to which they have access, by virtue of their fiduciary capacity”. 

What is price-sensitive information?

Per the consultation paper, price-sensitive information can be defined as any information pertaining to a scheme of a mutual fund that is not yet generally available and which could materially impact the Net Asset Value or materially affect the interest of unit holders.”  Instances of price-sensitive information include changes in the accounting rule and value of an asset, transformation of an open-ended scheme to a close-ended scheme and vice-versa, creation of a segregated portfolio, change in the liquidity position of a mutual scheme, etc.    

The changes will apply to a wide ambit of people

In addition to mutual fund managers and other officials who might be in knowledge of privy information, any employees of AMFI (Association of Mutual Funds of India), employees of the stock exchange, the mutual fund auditor, or the legal advisor would not be able to sell mutual fund units if they have any knowledge of sensitive information that could affect the NAV value. With a wide ambit of people coming under the change, SEBI has created a system where people who have sold mutual fund units but don’t know sensitive information can prove their innocence. 

For any clarifications/feedback on the topic, please contact the writer at sourabh.dubey@clear.in@clear.in