Sebi asks mutual funds to keep close watch on dealers

In a move to curb front-running,  the Securities and Exchange Board of India (Sebi) has asked mutual fund (MF) houses to ensure they maintain records of phone conversations in the dealing rooms for eight years and that dealers don’t use personal cell phones to place orders.

The regulator's direction follows a June 17 order banning HDFC asset management company's (AMC) former equities dealer, Nilesh Kapadia, from stock market transactions. Kapadia was barred after allegations that he had tipped off his friend before placing orders for the fund house.

This practice, known as front-running, increases the cost of acquisition of shares or reduces the realisation from the sale of shares for the concerned mutual fund scheme. From Sebi investigations, front-running at HDFC AMC resulted in a loss of Rs 2 crore for its unit holders.

Some fund houses have already taken the cue and have made dealing rooms sound-proof, installed closed-circuit television (CCTV) cameras and are recording calls of even fund managers and not just dealers. Some fund houses are also not allowing dealers to interact with other staff members of the mutual fund house.

In a letter to fund houses, Sebi has said AMCs should ensure they have put in place the system or procedures to review the phone conversation records of dealers by designated personnel of AMC on a periodical basis. The reports of this review will have to be submitted to the trustees of the fund house. 

Further, the market regulator has asked fund houses to ensure that terms of reference of internal auditors include review of reports filed by their designated personnel and these should be made available for Sebi’s inspection process.

“The incident at HDFC AMC could be the trigger for Sebi’s letter,” said managing director of a leading fund house. “Even now, we don’t allow cell phones in our dealing room and also record telephone conversations.”
 

LEAK PROOF

* MFs to ensure dealers don’t place orders via cell phones 

* To tap phone conversations in dealing rooms, keep record for 8 years

* Designated personnel of MFs to periodically review phone recordings, submit report to trustees

* Internal auditors to review reports filed by designated personnel

Sources in the mutual fund industry said the HDFC AMC case was not an isolated incident. According to them, Sebi is investigating the role of two top mutual fund managers for front-running. Also, the deals done by them in some unlisted companies are under the regulatory scanner. The schemes managed by these two fund managers have witnessed major redemptions, especially from corporate clients, sources said.