SEBI considers bringing mutual funds under insider trading purview

NEW DELHI: Capital market regulator the Securities and Exchange Board of India is considering bringing in mutual fund units under the purview of insider trading regulations.

Insider trading generally refers to buying or selling a stock or any financial assets on the basis of material, non-public information about them.

The market regulator on Friday put out a consultation paper seeking views from various stakeholders and public comments on the proposal.

Public views shall be sent via mail to pit-mf@sebi.gov.in by July 29, 2022. The objective of the consultation paper was to solicit public comments and views on the proposal to cover dealing in units of Mutual Funds under SEBI (Prohibition of Insider Trading), Regulations, 2015, so as to harmonize the regulations governing trading in securities, while in possession of unpublished price sensitive information.

In the past, it was observed that a registrar and transfer agent of a mutual fund had redeemed all its units from a scheme, being privy to certain sensitive information pertaining to the scheme of a mutual fund, which was not yet communicated to the unit holders of a particular scheme, the paper said.

Citing another instance, it said a few key personnel of a mutual fund were found to have redeemed their holdings in the schemes, while in possession of certain sensitive information not communicated to the unit holders of the schemes.

"A need has, therefore, been felt to harmonize the provisions in PIT Regulations to initiate serious enforcement actions against those who misuse the sensitive non-public information pertaining to scheme of Mutual fund, directly or indirectly, which they have access, by virtue of their fiduciary capacity," the per said.

Insider trading regulations are applicable to dealing in securities, of listed companies or proposed to be listed, when in possession of sensitive information, and by far the mutual funds were specifically excluded from the definition of securities under such regulations.

Further, the paper added it was also felt that the regulatory approach should not be onerous.

"For instance, though a person may possess an UPSI pertaining to a security, he may not have the knowledge of the existing portfolio of the Mutual Fund scheme or have any control over the fund manager's decision. Accordingly, it is considered to include a separate chapter in PIT Regulations, specifically to cover transactions in the units of Mutual Fund schemes, both close ended and open ended, so as to avoid complexities and such unintended consequences," it added.