Mutual Fund industry in advanced stage to set up internal fraud detection mechanism for MF scheme: SEBI

The Securities and Exchange Board of India (SEBI) on Thursday said that the Rs 50 lakh crore Indian mutual funds (MF) are in the process of setting up an internal mechanism to detect market frauds like front-running, inside trading, and others.

Talking to mediapersons, Madhabi Puri Buch, Chairperson, SEBI, said the process will be done in phases. "The MF industry (Association of Mutual Funds of India; AMFI, the MF industry's trade body) is in advanced stages to complete formulating the proposal. This is a complex process, hence it has taken time," Buch said .

She added in the first phase, large fund houses would need to implement it. She said that fund houses with size of Rs 10,000 crore and higher would need to implement this within three months after SEBI issues final guidelines. Other fund houses would need to implement within six months.

In April 2024, Sebi said it would make 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 approved amendments to SEBI (Mutual Funds) Regulations, 1996 to enhance the existing regulatory framework by requiring Asset Management Companies (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. 

Earlier, Sebi had announced that 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.