In the current Axis Mutual Fund scam that went down – a fund manager and an analyst were allegedly charged of avoiding their legal and regulatory obligations and responsibilities to investors as well as their fund houses.

The pair is thought to have engaged in front-running while being employees at the 7th largest mutual fund of the country. The claims against them are still being investigated.

Front-running, also informally known as “tailgating”, is the unlawful use of advance security information that mutual fund employees have disclosed to brokers.

This “tips off” the trader and gives them an edge over competitors. This is a guaranteed approach to making a lot of money on upcoming purchases. Also, bigger gains are possible with leveraged buying.

However, as easy as it may sound, pulling this off is quite a complicated process.

Let us take a quick glance at how this kind of scam could give a mutual fund manager unjustified compensation. Fund managers often use market trends expertise, research, and analysis to find worthwhile or investable stocks in advance.

With this kind of knowledge, opportunity seekers can jump ahead of the trade by providing information to a reputable or preferred dealer. Before the fund house acts, the dealer buys or sells enormous quantities of the same stock since large buy/sell orders have the ability to change stock prices.

When the fund houses eventually buy or sell the shares, the price of the target shares changes significantly depending on the size of the order.

Thereafter, once the price changes in their favour, the dealer sells shares that have already been bought or buy back shares that have already been sold at a significantly greater or lower value, thus increasing his revenues in just a few hours.

Why would a fund manager involve in this very complicated and unscrupulous act? Well, frequent and well-planned front-running can produce substantial unjustified advantages. Using the mule accounts of partners and acquaintances instead of one’s own can let a dealer avoid culpability.

The dealer then sends a piece of the stolen cake back to the fund manager through a variety of bribes, who spends it to live a luxury lifestyle that is at odds with his legal income – there that is the catch!

Three unnamed individuals who participated in front-running Reliance Capital Mutual Fund (RCMF) trades were sanctioned by the market regulator at the beginning of last year. They were asked to forfeit the illicit revenue in addition to being barred from capital markets for six months.

Read more: What Is A Money Market? Finance Simplified For Beginners

It is rather upsetting, especially for the youth of India to develop a taste in mutual fund investments. Taking the past and present scene of MF fraud into account, it is quite discouraging. These violations have hurt fund firms’ and their clients’ returns in addition to garnering media attention.

Front-running is specifically defined as a fraudulent and unfair practise in the SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003.

This clause has been used frequently by SEBI to impose sanctions on front-runners. However, with front-running scams happening on a, more or less, yearly basis, SEBI needs to take a more active stand and impose stricter regulations.

SEBI might solve this problem, for example, by routinely auditing mutual fund institutions as well as their managers who handle sensitive or private information. Harsher fines, accelerated examination of all such cases, and yearly disclosure of the net worth of key executives and mutual fund managers can all be used to combat such wrongdoings.

The best way to find front-running is to employ the stock exchange’s surveillance mechanisms. Real-time market surveillance software is well-equipped to identify similar trading patterns between major investors and ordinary investors, which serves as the foundation for early regulator investigations.

Although front-running is unethical and against the law, it does not significantly harm the average stock and mutual fund investor. One needs to be careful and vigilant about the investments they decide to make. As a small time investor, one can be alert and follow patterns to avoid such losses, if any.

Image Credits: Google Images

Feature Image designed by Saudamini Seth

Sources: Business Line, Financial Express, The Economic Times

Find the blogger: @SreemayeeN

This post is tagged under: mutual fund investments, Mutual Funds, mutual funds danger, investment, stock market fraud, scam, axis bank, SEBI, Business, economy, india

Disclaimer: We do not hold any right, copyright over any of the images used, these have been taken from Google. In case of credits or removal, the owner may kindly mail us.

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