India's capital markets regulator considers insider trading rules for mutual funds

The SEBI has sought public opinion on initiating penal action against those who misuse sensitive information

The Securities and Exchange Board of India has asked for public comments on the matter until July 29. Reuters

India’s capital markets regulator is considering imposing insider trading regulations on mutual funds to bring them in line with rules governing securities trading.

The Securities and Exchange Board of India has sought public opinion on initiating penal action against those who misuse sensitive, non-public information related to mutual fund plans, directly or indirectly, as part of their fiduciary capacity, according to a consultation paper released on Friday.

The regulator has asked for comments until the consultation closes on July 29.

The regulator noted that in the recent past registrars, transfer agents and top personnel of asset management companies have redeemed their holdings in mutual fund plans while in possession of unpublished sensitive information.

The regulator’s proposals are a fallout of Franklin Templeton’s closure of six debt funds in 2020, where it wound up $4.1 billion after a liquidity crisis compelled the firm to freeze investor withdrawals.

In 2021, the regulator had barred top executives including Franklin’s then-head of Asia-Pacific Distribution Vivek Kudva for redeeming their units ahead of the other investors and breaching fiduciary duties.

It barred them from accessing the securities market for a period of one year and imposed a combined penalty of 70 million rupees ($883,260).

The proposed rules define who is considered an insider, unpublished price-sensitive information and connected persons.

"It seems that the regulator has very widely defined two categories — connected persons and unpublished price-sensitive information and they may need to narrow it down as otherwise such a wide proposal will make trading in mutual fund a problem for fiduciaries,” said Sandeep Parekh, managing partner of FinSec Law Advisors.