In another incident of front-running trading, one of the largest mutual fund management companies in India, Axis Asset Management Co, is now under scrutiny in an alleged case of violation of security laws. Axis Mutual Fund is operating under Axis Asset Management Co.
Two former employees of the fund management company, who got fired during an internal enquiry, allegedly did front-running trades, which are illegal in India.
What is Front Running?
Front Running (commonly known as tailgating) is a practice in which a person who knows some kind of information regarding a company or an entity misuses such information to conduct the trade of shares.
The information which is known to him, or she, could be regarding any transaction (monetary or non-monetary) which can influence share prices of the company.
When an individual tries to make a profit by trading using that info as an advantage, then it is called front running.
According to section 4 (2) (q) of SEBI (prohibition of fraudulent and unfair trade practices relating to securities market) regulations, 1995, front running is an illegal practice in India.
Axis Asset Management Co.
Axis Asset Management Co. is the seventh-largest mutual fund manager in India, with Axis Bank and Schroders plc (25% stake) as main shareholders. As of 2021, Axis Asset Management company has assets worth $110 million and equity worth $91 million.
Front Running case
All the events related to this issue started in January 2022 when a few market participants informed the company management regarding suspicious transaction activities which are executed by Viren Joshi.
Viresh Joshi joined the company during its early periods in 2009 as a normal worker. Later in 2019, he became chief dealer who looks after trading operations in the asset management firm.
Soon after receiving information from various dealers regarding the actions of Viren Joshi and his absence during trading hours on various days, the company decided to launch an internal enquiry regarding the same.
The investigation was being conducted by Alvarez & Marsal Inc. In early May, Axis Mutual Fund said it had put Joshi and another fund manager, Deepak Agrawal, under suspension pending an internal probe into potential irregularities.
After the internal investigation, the company submitted the findings of Alvarez & Marsal Inc. to regulatory authorities who look after compliance with security laws in India.
During this internal investigation by the company, the Securities & Exchange d of India had begun their own investigation regarding the front-running issue by two employees of Axis Asset Management Co.
Various regulators and SEBI conducted investigations on the matter. Massive search and seizure operations were conducted by the market regulator at the offices and residences of Axis Mutual Fund executives.
The investigations and search operations were reportedly conducted in nearly 30 locations across different cities in India.
As the events pertaining to the investigation happened in the month of January 2022, it is still unknown whether Viren Joshi and other dealers were working from home or their offices. This is important as usually office spaces where trading happens are sealed to main train confidentiality and are under continuous CCTV surveillance.
The CCTV surveillance is to ensure that no cheating or front running happens during trading hours.
During pandemic period, all the trading had moved from offices to homes, which had a lot of loopholes. Understanding this, a few months ago regulators ordered all offices to start working as normal.
According to the company, their action to sack Viren Joshi and Deepak Agrawal was according to the policies of the fund managing company. Investigative findings, evidence and non-cooperation from the chief dealer towards investigation were enough reasons for the company to fire Viren Joshi.
Viren Joshi has now filed a lawsuit against the company alleging wrongful termination and has sought 542.6 million rupees from the firm. Regarding the case, the company said in an email response to media groups that they will make their case in front of the court with all pieces of evidence and information of investigations.
According to some industry experts, SEBI should investigate and bring out actual information regarding the case as soon as possible in order to make sure that all players in share and similar sectors understand the importance of compliance with rules and regulations.
Some analysts found it surprising that SEBI was actually conducting investigations in such determination, which was never seen before.
It is certain that the investigations and court cases will surely increase the strict scrutiny of SEBI and such regulators on trading activities. The mutual fund industry in India is also going to feel the impact of the front-running cases, as the trust of investors would be seriously affected.