Mutual Fund units now under the net of insider trading regulations

Numerous actionable for Asset Management Companies

– Vinita Nair, Senior Partner |


Investment in MFs are very common these days. As on March 31, 2022 there were about 1120 open ended schemes and 354 close ended schemes[1]. Presently, in terms of Reg. 32 of SEBI (Mutual Funds) Regulations, 1996 every close ended scheme, other than equity linked savings scheme, are required to be listed on stock exchanges. 

Until, the present amendment, SEBI (Prohibition of Insider Trading) Regulations, 2015 (‘PIT Regulations’) were applicable in case of dealing in securities that are listed or proposed to be listed while in possession of Unpublished Price Sensitive Information (‘UPSI’). Units of mutual funds were excluded from the definition of securities under PIT Regulations and therefore, remained outside the purview of the said regulations.

The erstwhile PIT Regulations of 1992 was amended in 2002 to mandate Asset management Companies (AMCs) and Mutual Fund (‘MF’) Trustees to frame internal procedures and conduct for prevention of insider trading, pursuant to which any security which was purchased or sold or was considered for purchase or sale by the organization on behalf of its clients/ schemes of MFs was required to be put on the restricted/ grey list. Thereafter, at the time of finalization of PIT Regulations, the committee led by Mr. N. K. Sodhi felt that there is no longer a special need for a special or separate circular for a specific class of market intermediaries and therefore, the said circulars be withdrawn to ensure consistency. The definition of securities in the proposed draft of PIT Regulations forming part of the said report provided for the meaning assigned to it under the Securities Contract (Regulation) Act, 1956 (‘SCRA’) without any exclusion. It was also explained that an MF set up as a trust, that can issue units of close-ended schemes which are traded in the market would also be a ‘company’ for purposes of the proposed regulations. However, the PIT Regulations as approved by SEBI in its meeting held on November 19, 2014 excluded MF units from the definition of securities. The thought process, as indicated in a news piece, was that even if a person has inside information regarding one company, he cannot possibly take advantage on that information by investing in a scheme, which is a diversified pool of securities of various companies and that there existed strict and transparent norms of NAV (net asset value) calculations and offence of front-running was already covered under SEBI (Fraudulent and Unfair Trade Practices) Regulations, 2003.

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