scorecardresearchAxis Mutual Fund Case: Front-running explained

Axis Mutual Fund Case: Front-running explained

Updated: 08 Jul 2022, 10:47 AM IST
TL;DR.
There are allegations of front running in the Axis mutual Fund case which entails buying a stock prior to an expected large transaction by a mutual fund that will likely raise the share price.
The SEBI searches are carried out at 30 locations across parts of Maharashtra and Gujarat.

The SEBI searches are carried out at 30 locations across parts of Maharashtra and Gujarat.

As SEBI conducts searches in Axis MF case, we explain what is front running, and whether such irregularities were noticed in the past.

This particular case relates to a series of allegations against two executives of Axis Mutual Fund which include front running, receiving bribe from brokers and placing trade orders at inflated prices — in complete disregard to investors’ interests.

There are allegations that Axis fund managers jacked up the prices of stocks above the threshold levels of market capitalisation so that they became eligible for other fund houses to buy.

What is front-running?

Front-running includes buying a stock prior to an expected large transaction by a mutual fund that will likely raise the share price.

When mutual funds make a big order, some fund managers buy the same shares in their personal accounts before executing the MFs’ order.

When these fund houses buy shares in large quantities, the share prices tend to go up. Sebi has categorised front running as a form of market manipulation and insider trading.

“What was done by these two individuals was wrong. However, one must wait for the complete auditing by SEBI before you understand the seriousness of the case. Until then you have to wait and watch,” says S Sridharan, founder and principal officer, Wealth Ladder Direct.

Search and seizure

Recently, the capital markets regulator SEBI carried out search and seizure at 16 entities including offices of Axis Mutual Fund, stock brokers and individuals as part of the current probe into alleged wrongdoings by two former fund managers oof Axis Mutual Fund.

These searches are done at 30 locations across cities and towns in Maharashtra and Gujarat.

There were reports that suggested that SEBI received alerts from its internal surveillance system and inputs from NSE about suspected front running of trades at Axis Mutual Fund.

The regulator started investigations based on the alerts and surveillance inputs.

Axis MF carried out audit

Even Axis Mutual Fund conducted an audit on alleged transgressions by two fund managers and submitted to the SEBI. As a matter of fact, Axis MF stated that it was investigating since February 2022, using ‘reputed external advisors’ to aid the investigation.

The fund house subsequently terminated the services of two executives — Viresh Joshi, chief trader and fund manager and Deepak Agrawal, an assistant fund manager.

Meanwhile, Axis Asset Management on Sunday issued a statement saying that it is cooperating with regulatory authorities.

"Axis AMC has been conducting a suo motu investigation since February 2022, with assistance from reputed external advisors. While the review process is still continuing, additional actions have been taken as part of the ongoing investigation, and various enhancements are being implemented based on findings, till date," the fund house said in a statement issued on Sunday.

The allegations against the money managers were front-running, receiving bribe from brokers and carrying out trades that were against the interests of the unitholders.

While allaying the fears of investors, Mr S. Sridharan from Wealth Ladder Direct, explains the likely impact of front running: “SEBI bars AMCs to have more than 5 percent exposure to any single stock. So, even if that particular stock falls by 50 percent, the impact on portfolio wouldn't be more than 2.5 percent -- which the scheme will recover in the long run,” adds Mr Sridharan.

He also says that frauds have taken place in banks and NBFCs and mutual funds are no exception.

Notice by sacked employee

Meanwhile, Axis Mutual Fund’s ousted fund manager Viresh Joshi sent a legal notice to his former employer alleging that the dismissal was wrongful.

It is worth mentioning here that Joshi and Deepak Agrawal were asked to leave the fund house on May 18 on allegations of front-running and receiving kickbacks from brokers.

Article
Capital markets regulator Sebi has categorised front running as a form of market manipulation and insider trading.

Past case

It is noteworthy that this is not the first case of irregularity or even of front-running. Axis Mutual fund is not the only case the Sebi is probing following allegations of fund managers and dealers front running stocks. The regulator is investigating at least three other cases.

Last year Sebi also fined top managers of Franklin Templeton after a forensic audit discovered that the fund house abruptly shut down six debt schemes in April 2020, because it was not able to meet redemption requests since the securities were illiquid.

In that case, Sebi found ‘similarities in investment strategy’ and ‘concentration of similar securities across schemes’ although the investment objectives of the six schemes were different.

In that case, it also came to light that a few days before these debt schemes were to be wound up, senior executive of Franklin Templeton Vivek Kudva, his wife and his mother, Vasanthi Kudva, withdrew their own money from these six debt funds amounting to over 50 crore.

First Published: 30 May 2022, 06:00 PM IST