SEBI Proposes Mechanism for AMCs To Check Possible Market Abuse, Fraudulent Transactions
26-08-2023
12:32 PM
1 min read
What’s in today’s article?
- Why in News?
- About Securities and Exchange Board of India (SEBI)
- Why was SEBI Formed?
- Powers of SEBI
- What is an Asset Management Company (AMC)?
- What are the Pros and Cons of AMCs?
- News Summary
- Why did the SEBI Propose these Recommendations?
Why in News?
- Capital markets regulator SEBI proposed that asset management companies set up surveillance and internal control systems for the deterrence of possible market abuse and fraudulent transactions.
About Securities and Exchange Board of India (SEBI)
- The SEBI is a statutory regulatory body established by the Government of India in 1992. It was given statutory powers through the SEBI Act, 1992.
- Objective: To regulate the securities market in India and protect the interests of investors in securities.
Why was SEBI Formed?
- SEBI was established to keep a check on unfair and malpractices and protect the investors from such malpractices.
- The organization was created to meet the requirements of the following three groups:
- Issuers: SEBI works toward providing a marketplace to the investors where they can efficiently and fairly raise their funds.
- Intermediaries: SEBI works towards providing a professional and competitive market to the intermediaries
- Investors: SEBI protects and supplies accurate information to investors.
Powers of SEBI
- Quasi-judicial powers –
- In case of frauds and unethical practices pertaining to the securities market, SEBI has the power to pass judgments.
- The said power facilitates to maintain transparency, accountability and fairness in the securities market.
- Quasi-executive powers –
- SEBI has the power to examine the Book of Accounts and other vital documents to identify or gather evidence against violations.
- If it finds one violating the regulations, the regulatory body has the power to impose rules, pass judgements and take legal actions against violators.
- Quasi-legislative powers –
- To protect the interest of investors, the authoritative body has been entrusted with the power to formulate suitable rules and regulations.
- Such rules tend to encompass the listing obligations, insider trading regulations and essential disclosure requirements.
- The body formulates such rules and regulation to get rid of malpractices that are prevalent in the securities market.
What is an Asset Management Company (AMC)?
- Asset management companies (AMCs) are firms pooling funds from various individual and institutional investors and investing in various securities.
- The company invests the funds in capital assets such as stocks, real estate, bonds, and so on.
- The asset management companies have professionals called fund managers who manage the investment and the research team selects the right securities.
- Fund managers identify the investment options that are in line with the objectives of the fund.
- For instance, a debt fund invests mostly in bonds and government securities to protect the investment and earn a steady return.
- An equity fund mainly focuses on investing in shares of companies to maximise return for the investors.
- In most cases, AMCs charge a fee that is calculated as a percentage of the client's total Asset Under Management (AUM).
What are the Pros and Cons of AMCs?
Image Caption: Pros and Cons of AMCs
News Summary
- The Securities and Exchange Board of India (SEBI) has proposed that asset management companies set up surveillance and internal control systems for the deterrence of possible market abuse and fraudulent transactions.
- It further suggested that senior management of AMCs should be responsible for ensuring that an institutional mechanism is put in place to detect and report possible misconduct by its employees, dealers, stock brokers, or any other connected entities.
- Further, AMCs should have appropriate escalation and reporting mechanisms for possible market abuse and fraudulent transactions in securities.
- The SEBI has sought comments from the public till June 3, 2023 on these proposals.
Why did the SEBI Propose these Recommendations?
- The SEBI has come up with these recommendations in the wake of passing orders in two instances of front-running pertaining to Axis AMC and the Life Insurance Corporation of India (LIC).
- Frontrunning is when a person, mainly a broker or an advisor, takes a buy or sell position in any stock based on exclusive knowledge that the recommendations being issued by them will certainly lead to price variation in the particular stock in the near future.
- In the Axis AMC case, broker-dealers, certain employees, and connected entities were found to have front-run the trades of the AMC.
- In the case of LIC, an employee of a listed insurance company was observed to be front-running the trades of the company.
Q1) What is share market in simple words?
The share market is a platform where buyers and sellers come together to trade on publicly listed shares during specific hours of the day. People often use the terms 'share market' and 'stock market' interchangeably.
Q2) What is the meaning of equity fund, debt fund and hybrid fund?
Equity funds – invest in listed equity shares and other equity-oriented instruments.
Debt Funds – invest in fixed income instruments like treasury bills, commercial papers, certificates of deposit, corporate bonds, and government bonds.
Hybrid Funds – invest both in equity and fixed income instruments.
Source: SEBI Proposes Mechanism for AMCs To Check Possible Market Abuse, Fraudulent Transactions | BQPrime