Background -
The Securities and Exchange Board of India (SEBI) is making it mandatory for Asset Management Companies (AMCs) to have an institutional mechanism for deterrence of potential market abuse, including front-running.
Considering the recent front-running instances observed by the market regulator, the SEBI Board on Tuesday approved amendments to SEBI (Mutual Funds) Regulations, 1996.
New guidelines-
This is to enhance the existing regulatory framework by requiring AMCs to put in place a structured institutional mechanism for identification and deterrence of potential market abuse including front-running and fraudulent transactions in securities.
The mechanism shall consist of enhanced surveillance systems, internal control procedures and escalation processes to identify, monitor and address specific types of misconduct including front running, insider trading and misuse of sensitive information,” SEBI announced.
Front-running is trading in stock, or any other financial asset by a broker who has inside knowledge of a future transaction that is about to affect its price substantially.
The Board also approved enhancing responsibility and accountability of AMCs for such an institutional mechanism and foster transparency by requiring AMCs to have a whistle blower mechanism.
Mutual funds
A mutual fund is a pool of money managed by a professional Fund Manager.
It is a trust that collects money from a number of investors who share a common investment objective and invests the same in equities, bonds, money market instruments and/or other securities.
And the income / gains generated from this collective investment is distributed proportionately amongst the investors after deducting applicable expenses and levies, by calculating a scheme’s “Net Asset Value” or NAV.
SEBI regulates mutual funds through the SEBI (Mutual Funds) Regulations, 1996.
2 types –
An actively managed fund is a mutual fund scheme in which the fund manager “actively” manages the portfolio and continuously monitors the fund’s portfolio, deciding on which stocks to buy/sell/hold and when, using his/her professional judgement, backed by analytical research.
A passively managed fund, by contrast, simply follows a market index, i.e., in a passive fund , the fund manager remains inactive or passive in as much as, he/she does not use his/her
judgement or discretion to decide as to which stocks to buy/sell/hold , but simply replicates / tracks the scheme’s benchmark index in exactly the same proportion.
Mutual funds in India operate under a three-tier structure, comprising the
Asset Management Company (AMC),
Trustees, and
Custodians
The AMC manages the fund’s investments, the Trustees oversee the operations, and the Custodians safeguard the fund’s assets.
AMC
It is a firm that invests the funds pooled from individual investors in securities with the objective of optimal return for investors in exchange for a fee.
AMC maintains the diversity of portfolio by investing in both high-risk and low-risk securities such as stock, debt, real- estate, shares, bonds, pension funds, etc.
Because they have a larger pool of resources than the individual investor could access on their own, AMCs provide investors with more diversification and investing options.
AMCs are colloquially referred to as money managers or money management firms.
Those that offer public mutual funds or ETFs are also known as investment companies or mutual fund companies.
SEBI is the Indian Capital Market Regulator which governs and controls every AMC in India.
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