AMFI Lays Down New Rules to Curb Market Abuse in Mutual Funds

The Association of Mutual Funds in India (AMFI) has implemented new minimum standards to prevent front-running and market abuse by asset management companies (AMCs). These measures are in response to a recent circular issued by the Securities and Exchange Board of India (SEBI), which mandated AMCs to establish institutional mechanisms to deter such activities.

The new standards will be implemented in phases, beginning in November, for equity schemes with assets under management (AUM) exceeding ₹10,000 crore. Schemes with lower AUM will be subject to the rules from February. Passive, arbitrage, and overseas schemes will follow in May, while debt and other schemes will be covered from August next year.

To detect suspicious trading activity, AMCs must generate three-tier alerts weekly and establish standard operating procedures for reviewing these alerts. The first tier will be based on participation volume and volume-weighted average price for large, mid-, and small-cap stocks. The second tier will consider price movements during deal execution, block trades, and scrip volumes traded within an hour before the AMC’s trade. Suspicious alerts will be investigated further.

AMCs will review recorded communications of key employees, entry logs of AMC premises, and CCTV footage to examine suspicious alerts. Biometric access to dealing rooms will be mandatory. While mutual fund employees typically seek prior approval from compliance teams before placing trades, AMCs can review their transactions and those of their immediate relatives if linked to suspicious alerts. They can also access trade-related data from exchanges and depositories based on their PAN.

To address front-running by brokers, AMCs will include a clause in broker empanelment agreements allowing for actions against such misconduct, including abrupt termination of services.

An industry official highlighted the complexity of identifying suspicious trades, noting that various factors can influence share price movements. The regulator is particularly concerned about minimising the time lag between trade instructions and execution, especially for large-cap stocks.

While SEBI will continue its own surveillance, the new norms will increase compliance costs for AMCs and impose additional obligations. The software required to track certain data can be expensive, and the industry is seeking to obtain it directly from exchanges for level two alerts.

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Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.