Feb 24, 2023
Sebi steps up vigil on MF industry
The Securities and Exchange Board of India (Sebi) on Monday put out a tender, inviting expressions of interest (EOIs) from eligible companies for empanelment to take up forensic audit of fund houses, their asset management companies and trustee entities/board of trustees.
The auditors empanelled will be required to undertake forensic acquisition and extraction, including imaging of different devices, following which they shall submit a report with their findings and conclusions to the markets regulator.
In the past one decade, the MF industry has grown close to 5x with assets under management touching Rs 40 trillion as of December, from Rs 8 trillion in November 2012.
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In its earlier paper, the regulator had proposed MF trustees should monitor instances of market abuse by AMCs and its employees, as well as mis-selling to increase the asset base.
The markets regulator has, of late, stepped up vigil with respect to front-running in fund houses and broking firms. Front-running is the practice of purchasing shares and securities based on advance information regarding large transactions, which has otherwise not been made public, and could have a material impact on the price of a security.
It comes under the category of market manipulation and insider trading. It constitutes is a serious violation and comes under the Sebi (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003.
Auditors appointed by the regulator are also said to have visited fund houses, seeking call record data of senior officials. In addition, the regulator is also said to be asking for backup data of transactions by such fund houses for audit.
The mutual fund industry has faced several front-running cases in the past decade. While fund houses say that they are putting in place more controls, such as keeping track of relatives, friends, etc, of key employees to make sure that any front-running could be clamped down early on, it is actually a very difficult job to do so. Some fund houses have also resorted to external reviews done on a quarterly basis.
Recent instances of front-running and market manipulation are likely to have pushed the regulator to step up guard. Axis Mutual Fund had come under scanner last year owing to certain breaches of securities laws. The allegations led to two fund managers Viresh Joshi and Deepak Agrawal being terminated.
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According to the tender, applicants must have reported total revenue from forensic audit assignments of at least Rs 1 crore in the last three financial years, in addition to experience of assignments in the field of mutual funds.
Sebi has granted time till March 6 for applicants to send their EoIs.
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