SEBI Board Meet: Mutual Funds Told To Have Mechanism To Prevent Front-Running, Fraud

Asset management companies need to have an institutional mechanism for deterrence of potential market abuse, including front-running, said the Securities and Exchange Board of India.

The markets regulator also eased group firm investment norms for equity passive funds, during the 205th meeting of the SEBI Board held in Mumbai on Tuesday.

Here are the key outcomes:

Fraudulent Trades In MFs

Considering the recent instances of front-running, the markets regulator has approved amendments to enhance the existing regulatory framework.

These will require fund houses to put in place a structured institutional mechanism for identification and deterrence of potential market abuse, including front-running and fraudulent transactions in securities.

It has also approved an amendment to foster transparency by requiring AMCs to have a whistle-blower mechanism.

Norms For Passive Funds

The regulator has eased group firm investment norms for equity passive funds. It has excluded equity passive funds from the 25% investment limit in group firms.

Currently, MF schemes are not allowed to invest more than 25% of their net asset value in group companies of the sponsor, which restricts passive funds from effectively replicating the underlying index, in cases where group companies of the sponsor comprise more than 25% in the index.

Thus, the board has approved to allow equity passive schemes, on indices to be specified by SEBI, to take exposure up to the weightage of the constituents in the underlying index. This exposure would, however, be subject to an overall cap of 35% investment in the group companies of the sponsor.

Lower Face Value For NCDs

It has allowed a lower face value for privately placed non-convertible debentures and preference shares. Companies can now privately place bonds with a face value of Rs 10,000, subject to appointment of the merchant banker.

For FPIs Based In IFSC

The board has also approved a regulatory framework for providing flexibility for increased contribution by non-resident Indians, overseas citizens of India in the corpus of certain FPIs based out of International Financial Services Centres in India.

Further, it has approved the 'ease of doing business' for Market Infrastructure Institutions—including the proposal that MIIs may continue to disclose their shareholding pattern in the format applicable to listed companies and are no longer additionally required to disclose it in a separate format.