SEBI penalises officials from two fund houses

The Securities and Exchange Board of India (SEBI) has penalised senior officials of two fund houses in separate orders.

In its interim order, the market regulator barred Viresh Joshi, the former chief dealer of Axis Mutual Fund, from dealing in markets for engaging in "front-running" activities. In another order, SEBI imposed a penalty on the Head of Operations of Bank of India Mutual Fund for taking advantage of having all unpublished material information about the valuation of defaulted securities.

Axis Mutual Fund front-running case
The interim order related to front-running trades at Axis Mutual Fund has restrained Viresh Joshi and 20 other individuals from dealing in securities markets and directed them to deposit Rs 30.56 crore earned improperly through front-running (Read here).

Front-running involves buying or selling securities ahead of a large order to benefit from the subsequent price move. It refers to market participants who are aware that a large transaction is imminent and that prices are likely to move in their favour.

SEBI's surveillance systems generated alerts regarding certain trades between September 1, 2021, and March 31, 2022, which were suspected to be front-running the trades of Axis Mutual Fund. SEBI then initiated multiple investigations, including seizing various digital records, mobile phones, laptops, etc., from the suspected entities.

During the investigation, SEBI found that various individuals connected to Viresh Joshi had traded in different securities ahead of the impending orders placed on behalf of the fund house. SEBI found that all 21 individuals collectively earned an aggregate sum of wrongful gains amounting to Rs 30.56 crore from their trading activities.

The regulator has initiated proceedings against a large number of additional entities based on preliminary information gathered, apart from the entities under investigation. But importantly the long 96-page interim order does not suggest any wrongdoing on part of fund managers or the AMC and therefore, the penal action is restricted to Mr Joshi and people associated with him.

This order does not adversely impact mutual fund schemes or their investors and therefore, they need not unnecessarily act in haste.

Fine on Bank of India Mutual Fund operations head
In another adjudication order, SEBI imposed a penalty of Rs 10 lakh on Shubro Sankha Das Sarma, Head of Operations at Bank of India Investment Managers, for selling his holdings in BOI AXA Credit Risk Fund based on the unpublished material information about the devaluation of the defaulted securities which he was privy to (Read here). SEBI stated that Sarma, a member of the Valuation Committee, redeemed his holdings in the fund based on non-public information that he possessed as a result of his position in the AMC, including as a member of the Valuation Committee. This is a serious breach and a punishable offence.

Should investors be worried?
Both the orders assume significance given the seriousness of the offences committed. Subsequent to these lapses coming to light, SEBI has also upgraded its regulatory framework to possibly avoid their recurrence. But as said earlier, these orders do not have any adverse impact on the schemes in question or their investors.