The capital market regulator Securities and Exchange Board of India (SEBI), in a consultation paper, has proposed to include transactions in mutual funds units under the insider trading rules. The purpose of this move is to harmonise the regulations governing trading in securities, while in possession of "unpublished price sensitive information", says SEBI.

The move would limit fund managers or senior fund house officials from selling mutual fund units of any scheme if they are in possession of any "price-sensitive information". So far, the units of mutual funds are excluded from the definition of securities under the Prohibition of Insider Trading (PIT) Regulations.

Without going into specific details, the capital market regulator cited two instances behind floating the working paper. SEBI says, in the past, a registrar and transfer agent of a mutual fund had redeemed all its units from a scheme, despite being privy to certain sensitive information about a scheme that was not yet communicated to the unitholders. In another instance, 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 unitholders.

SEBI says it has certain provisions in place to limit such actions by company employees. On transactions by employees of AMCs/trustees in mutual fund units, SEBI rules require reporting of such transactions to the compliance officer and place restrictions on periods during which such employees can't transact in the units of concerned mutual fund schemes.

In October last year, SEBI also introduced certain provisions stating that employees of AMCs, their board members, and board members of trustees can't transact in any scheme while in possession of certain sensitive information not communicated to the unitholders.

However, the units of mutual funds are, specifically, excluded from the purview of SEBI's PIT Regulations. The SEBI paper says there is a need to initiate serious enforcement actions against "those who misuse the sensitive non-public information pertaining to the scheme of mutual fund", to which they have access, by virtue of their fiduciary capacity.

At the same time, SEBI thinks the regulatory approach should not be "onerous". For instance, though a person may possess unpublished price sensitive information (UPSI) about security, they may not have knowledge of the existing portfolio of the mutual fund scheme or have any control over the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," says the market regulator.

As per SEBI, UPSI is any information about a mutual fund scheme, which is not yet generally available and could materially impact the net asset value or affect the interest of unitholders.

SEBI consultation paper comes after the wind-up of six Franklin Templeton mutual fund schemes in 2020. SEBI found out that fund house director Vivek Kudva and his wife Roopa Kudva violated its rules by redeeming their investments in these schemes before the fund house allowed its customers to stop withdrawing from these schemes. Since Vivek Kudva held the top position, he was in possession of unpublished price-sensitive information, it said. The SEBI order was challenged in Securities Appellate Tribunal (SAT) by the Kudvas, but the final judgement is still awaited.

price sensitive information

SEBI proposes to include MF transactions under insider trading rules