SEBI (Securities and Exchange Board of India) was established in 1988 and given statutory powers through the SEBI Act of 1992. The primary objectives of the board are to safeguard the interest of investors, ensure the growth of a healthy securities market, and promote fair practices by regulating it.
The investigation conducted recently by SEBI on June 24, 2024, discovered that there were some suspicious trading activities taking place in the quant mutual fund, which has led to accusations such as front-running – where people trade on non-public information about forthcoming orders with the intention of making profits at other investors’ expense.
SEBI examined huge volumes of trade data besides looking into communication records while also conducting searches at various premises belonging to quant MFs staff, including key management personnel residential places too; these measures have resulted in immediate action being taken like suspensions or restrictions imposed on certain types of trading aimed at curbing malpractices and protecting the interest of investors.
This article seeks to explain what SEBI’s quant mutual fund review involves and shed light on what is known as front-running and its implications for financial markets.
Also read: Mutual funds or stocks: Which is a better investment?
What is front-running?
Front-running is a sneaky move on financial markets. Think of it like having insider information about which horse will win the race. Rather than betting like everyone else, you get in front of them and place your bet seconds before the race starts — that’s front-running!
Here’s how it works in the stock market:
Inside information: Occasionally, stockbrokers and traders possess information that is not available to the public. An instance would be when they are aware of the fact that an institutional investor, such as a mutual fund, plans to purchase a significant number of shares in a particular company.
Unfair advantage: With this knowledge in hand, they act fast. They buy or sell the same stock just before the big order hits the market. Why? Because they know the stock price will likely move in their favour due to the upcoming order.
Profit at others’ expense: By front-running, these brokers make a quick profit. But guess who loses? Regular investors who don’t have the same secret information. Their trades are affected by the sudden price movement caused by the big order.
Market integrity at risk: Front-running undermines fair play. It erodes trust in the market and harms small investors. Regulators like SEBI take it seriously and investigate such practices.
Front-running is similar to insider trading. In front-running, the information isn’t about a specific company. Insider trading involves confidential information that is specific to a company and not accessible to the public.
Front-running is illegal in India. Such actions, if proven, could lead to severe penalties for the individuals involved and raise questions about the fund’s performance.
You may also like: What is insider trading in the stock market?
The SEBI investigation into quant mutual fund India
SEBI’s regular inspections of quant MF revealed discrepancies, prompting a deeper investigation into their activities. Some trades seemed to happen before quant MF’s, which led to suspicions of front-running. This suggests that insider information could have been used to make money.
If it turns out that fund managers or other employees were involved in front-running, they could be fined, and the fund’s performance could be called into question. The overall effect on the fund might be lessened, though, if steps are taken to stop this from happening again.
The regulatory body has done raids and taken digital devices to look at communication and find any activity that seems odd. They are focusing on quant executives and people who are thought to have benefited from proprietary information and may have misused it.
SEBI took similar action before; in 2022, it investigated Axis Mutual Fund for front-running, leading to banning 21 entities from accessing capital markets, among other penalties imposed on them.
Impact on quant mutual fund and its investors
Quant MF, which was started by Sandeep Tandon, is one of the mutual funds in the country that has grown the fastest. The fund house was permitted by SEBI to start doing MF business in 2017.
The company had 26 schemes and 54 lakh folios when its assets topped ₹50,000 crore in January, 2024. In the past few years, quant MF has grown a lot thanks to money coming in from retail investors. In March 2020, its AUM was ₹233 crore. Now, in 2024, it’s ₹80,470 crore.
Must read: Understanding AUM: Mastering financial skills
Sandeep Tandon has been in the financial services business for 25 years. At the moment, Sandeep is in charge of making decisions about investments in 22 schemes.
Source: Quant MF Factsheet
Substantial financial implications and reputational damage have resulted from the SEBI investigation of quant mutual funds.
The fund’s management has been overshadowed by allegations of front-running, causing both retail and institutional investors to lose faith in the fund and, subsequently, its assets under management to decline.
Significant weaknesses in internal controls and compliance practices at quant MF were exposed by SEBI’s probe, thereby attracting more scrutiny from authorities as well as public opinion.
Immediate steps are being taken to review the fund’s operational practices so that no regulatory breaches go unchecked. It has promised full cooperation with SEBI to preserve market integrity alongside investor interest.
Nevertheless, this will only be achieved after recovering from a damaged reputation within an already highly competitive market where winning back trust may prove difficult.
Is the quant mutual fund safe? The safety of their investments is among many concerns voiced by various investors who also question general propriety regarding quant MF management systems. To avoid being associated with any form of financial malpractice, which might lead to losses, some investors have opted out of redemption due to fear sparked by such uncertainty.
On the flip side, though, some others are playing wait-and-see games, closely monitoring happenings around investigations before making any conclusive decisions. They expect that necessary corrective measures shall be taken by the company concerned about transparency coupled with compliance, thereby stabilising things over time.
Bottomline
Investigating Quant Mutual Fund, the Securities and Exchange Board of India (SEBI) has emphasised the need for transparency, compliance and investor protection in the capital market. The allegations of front running not only question the integrity with which quant MF operates but also bring out severe weaknesses in internal controls.
Quant MF is likely to suffer both financially and reputationally as it has already experienced a significant drop in AUM following the loss of confidence from investors.
This occurrence also calls for stricter regulations by authorities and better self-regulation among mutual funds as preventive measures against malpractice, which could affect the whole industry. The SEBI investigation into quant MF serves as a call to action for the industry to prioritise investor interests and maintain the highest standards of market integrity.
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