The mutual fund (MF) industry is set to approach the Securities and Exchange Board of India (Sebi) for relaxation in the recently implemented rules designed to prevent market abuse.
According to MF executives, the new rules that came into effect in November for large schemes have created operational challenges for fund managers, particularly when executing large transactions or participating in block deals.
The industry body, the Association of Mutual Funds in India (Amfi), has sought suggestions from fund houses, which will be forwarded to Sebi for further deliberations.
"While we plan to review and analyse the outcomes based on experiences from the past few weeks and submit our feedback to Sebi for any necessary adjustments, we observe that the MF participation in the equity market is not materially impacted due to the implementation of such best practices from November," said Venkat Chalasani, chief executive, Amfi.
The mechanism, designed to identify instances of market abuse like front running, mandates mutual funds to set up an alert system to identify possible fraudulent transactions.
These alerts are designed to flag transactions where the mutual fund has a higher share in the total volume of stock and there is a significant change in the stock price during the transaction.
For instance, a trade in large-cap stock can lead to an alert if the participation volume is 10 per cent or more and the deviation from the volume-weighted average price (VWAP) of the stock is more than or equal to 0.5 per cent.
For mid-caps and small-caps, the thresholds are higher.
In case the alert gets generated, the fund house has to check for other parameters like trade volumes ahead of the transaction.
If the suspicions remain, the fund manager and the investment team's activities have to be examined.
According to MF officials, the norms have forced fund managers to execute larger transactions in a staggered manner.
Some are also opting to stay away or reduce participation in block deals, which are generally large in size.
"While it's understood that not all alerts are fraudulent, the fund managers, dealers, and even the management want to avoid such instances," said an MF executive.
In their response to Amfi, some of the fund houses have suggested increasing the volume and price change threshold and excluding block deals from the alert mechanism.
For mutual funds having assets under management (AUM) of over Rs 10,000 crore, the deadline to implement the mechanism was November 2.
Others have time till February 2025.
The framework mandates other requirements like maintaining an entry log for the asset management company's premises and mandatory 10-day leave for fund managers and dealers.
It also has provisions for action against brokers if market abuse happens from their end.
