Mutual funds play a crucial role in the Indian financial market, attracting investments from various individuals and institutions. In the dynamic landscape of the Indian financial market, mutual funds have emerged as a popular investment avenue, pooling resources from a broad spectrum of investors to allocate in diverse financial instruments. The growth and stability of this sector are imperative for maintaining investor confidence and ensuring the integrity of the financial markets. It is here that the role of the recent amendment in the insider trading regulations ("PIT Regulations") becomes paramount. These regulations were notified by SEBI vide gazette notification dated November 24, 2022 with the intention to prevent the misuse of non-public, material information in trading activities related to mutual funds. Such misconduct not only undermines the fair and efficient operation of the financial markets but also erodes public trust in these investment vehicles.
Key Highlights of the Amendment
The highlights of the amendment can be summed up with SEBI's intent to bring mutual fund units at par with listed securities. However, there are some significant changes in the definitions and compliance framework. It is also significant that the framework excludes exchange-traded funds (ETFs) and eases restrictions on Systematic Investment Plans (SIPs), which constitutes a major chunk of investments for individual investors.1 Following are the major changes incorporated in the amendment:
Definition of "connected persons" include any person who is or has during the two months prior to the concerned act been associated with the mutual fund, asset management company and trustees, directly or indirectly, which allows such person to access to unpublished price sensitive information (UPSI) or is reasonably expected to allow such access.2 Further, the board of directors and key management personnel of the sponsor of the MF, banker of the MF or asset management company, stock exchange officials, employees of fund accountant, registrar, and share transfer agents, custodians or valuation agencies of the MFs, and the immediate relatives of these people are also included within the purview of connected persons.3
UPSI shall mean information that is not generally available to the public and the same is likely to materially impact the net asset value (NAV) or impact the interest of unit holders.4 It includes instances when there is likelihood to be a change in the accounting policy, a material change in the valuation of any asset or class of assets, restrictions on redemptions, winding up of schemes, creation of segregated portfolio, the triggering of the swing pricing framework and the applicability of the swing factor, and material change in the liquidity position of the concerned MF schemes and default in the underlying securities which is material to the concerned MF schemes.5
Challenges and reasons for non-implementation
Almost two years later, these norms are yet to be enforced even after being notified. There are several practical and operational hurdles around the norms which remain unaddressed. Some have been highlighted below:
- Digital Database: As per the new amendment, the asset management companies (AMCs) and fiduciaries
- the instances of UPSI being shared within or outside the AMC. This poses a major challenge as determining "likelihood" and "material impact" regarding the UPSI could be very subjective. Maintaining such a record poses technical challenges for which a proper framework is not yet present.
- Enforcement challenge: The definition of "connected person" is very broad and includes any person who was associated with the mutual fund/AMC in any capacity in the preceding two months. There are functional issues in tracking each person who may have been in association with such entities. SEBI could further face challenges in obtaining evidences in light of precedents such as Balram Garg v. Securities Exchange Board of India6, accordingly SEBI now has to satisfy a higher degree of burden of proof for admitting the circumstantial evidence in the insider trading cases.
Conclusion
The amendment in the insider trading framework serves not only as a deterrent against the misuse of UPSI but also as a foundation for fostering an environment of transparency and fairness in the financial markets. This is essential for bolstering investor confidence and facilitating the sustainable growth of the mutual funds industry. As the Indian financial market continues to evolve, the adaptability and robustness of insider trading regulations will be pivotal in addressing emerging challenges and securing the interests of all market participants. However, there remain some reasonable hurdles for SEBI and AMCs for the implementation.
Kartikey Maithani, Trainee Associate Advocate at S.S. Rana & Co. has assisted in the research of this Article.
Footnotes
6 Balram Garg v. Securities Exchange Board of India, 9 SCC 425, 2022
Related Posts
NORMS FOR INVESTMENT AND DISCLOSURE BY MUTUAL FUNDS IN DERIVATIVES
For further information please contact at S.S Rana & Co. email: info@ssrana.in or call at (+91- 11 4012 3000). Our website can be accessed at www.ssrana.in
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
