SEBI proposes surveillance system by MFs to check frauds

Capital markets regulator the Securities and Exchange Board of India (SEBI) has proposed that asset management companies (AMCs) should set up surveillance and internal control systems for the deterrence of possible market abuse and fraudulent transactions. The regulator’s proposal comes in the wake of two instances of front-running pertaining to two fund houses.

In a consultation paper, SEBI has suggested that senior management of AMCs should be responsible to ensure that an institutional mechanism is put in place to detect and report possible misconduct by its employees, dealers, stock brokers or any other connected entities.

Further, AMCs should have appropriate escalation and reporting mechanism for possible market abuse and fraudulent transactions in securities related to the AMCs’ transactions, SEBI said. In the Axis AMC front running case, broker- dealers, certain employees and connected entities were found to have front-run the trades of the AMC and in the case of a leading insurance company, an employee of a listed insurance company was observed to be front-running the trades of the company. SEBI proposed that AMCs should put in place robust surveillance systems and internal control procedures, to deter possible misconduct by employees or other entities which may have information relating to fund management and/or investments of mutual fund schemes.