Mutuals To Move Regulator Over Insider Trading

Irked by the insider trading regulations which put restrictions on mutual funds' directors from making investments, the funds are planning to move the Securities and Exchange Board of India (Sebi).

The insider trading regulations specify an arms-length approach, prohibiting directors on the board of an asset management company (AMC) who are also on the board of other companies from dealings with the shares of the other company in case the AMC has picked up its stock.

For instance, Kumar Mangalam Birla who is on the board of Birla Sun Life AMC is also the board of Tata Steel. Under the insider trading regulations, Tata Steel is treated as an associate company and so any investments in the company by Birla Sunlife prohibits directors on the AMC from having any dealings with Tisco shares for a certain period of time.

 

"This is applicable to all directors," sources in a leading private sector fund said. The idea is to avoid any conflict of interest.

The AMCs say that the directors -- especially independent directors -- may not always be aware of what the fund managers are doing. "The Sebi regulation is unfair to them," sources said.

Senior executives in the funds holding key positions are also subject to such investment restrictions. For instance, if a fund has bought the shares of a company, then the executives by virtue of holding key positions should not trade in the stock -- buy or sell -- for at least 15 days prior to the purchase and two months after the purchase.

This rule becomes applicable to the executives' spouse, children and other close relatives. Of course, all directors and executives have to make known upfront their investments and interests in any company.

Funds are planning to move Sebi with a plan to keep a threshold limit. "Investments should not be totally barred but the regulator can specify a limit upto which investments can be made."

Fund houses are already cramped by debt investment riders in mutual fund regulations where they are barred from investing in unlisted securities of an associate or group company of the sponsor or any security issued by way of private placement by an associate or group company.

This especially affects institution sponsored funds such as HDFC, ICICI where their nominees are also on the boards of corporates.