Many times investors privy to the inside information of a company are able to make huge profits by sale or purchase of shares or manage to avet big loses. However, it is illegal to do transactions based on inside information as per the rules of Securities and Exchange Board of India (SEBI).
Likewise, investors who are privy to the confidential information can increase their profits or reduce their losses even in the mutual funds. This is because a good news can increase the Net Asset Value (NAV) while a bad news can bring it down.
In view of this SEBI is mulling over bring regulations governing insider trading in the mutual funds.
Till now, the rules governing insider trading for securities does not cover mutual fund units. The market regulator is planning to bring the regulations after instances of insider trading in mutal funds have started coming to its notice.
SEBI has issued a consultation paper on this. The stakeholder feedback has been sought by 29 July.
In the discussion paper, the feedback has been sought on the implementation of the insider trading rules for open ended and closed ended schemes.
As per the SEBI discussion paper, now in the definition of trading, sale and purchase of mutual fund units, redeeming, switching will be included.
Meanwhile, under the insider trading rules of the mutual funds, all people connected with works related to the mutual fund and all those who are privy to inside information of any mutual fund will be considered as an insider.
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The discussion paper also gives clarity on which unpublished confidential information will be treated as an inside information. For e.g. if any body has information on changing of purpose of investment of a mutual fund scheme or if he has information on the changes in the accounting policy, then it will be treated as an unpublished confidential insider information.
Apart from this, default in any securities; significant changes in the valuation of assets; information on closure of any scheme or redemption will also be treated as insider information.
Stakeholder feedback is sought on the SEBI consultation paper.
Currently, the rules mandate that people with inside information about mutual funds are not allowed to do trading and there are other conditions too. But SEBI is now planning to make it wider.