AXIS MUTUAL FUND FRONTRUNNING INCIDENT EXPLAINED

by Anisha Deosaria and Ankita Ghosh Biswas

Axis Mutual Fund is the country’s seventh-largest fund house and recently they were in limelight for suspending two fund managers i.e., Viresh Joshi and Deepak Agarwal for violations on 4^th May. The two managers are suspended on the allegations of “front running”.

Now let’s understand what’s “front running”?

“Front Running” is illegal and unethical practice where a trader acts on insider information. As the name suggests, Insider trading is done by company’s employee aiming to profit from dealing in the company’s shares. “Front running” can be done in just about any stocks by unrelated people who have knowledge of how some large investors plan to trade in the market. Insiders can use accounts of their associates to execute such trades.

Here, in this case the two-fund manager (Viresh Joshi and Deepak Agarwal) took advantage of his knowledge of the orders that the mutual fund manager has lined up for the upcoming period and tries to make profit out of that.

Now let’s have a clear idea of the role of a mutual fund manager:-

The fund manager is in charge of placing orders and buying/selling individual stocks/bonds basically designing the portfolio from the pool of money which they have gathered from the investors. Mutual funds usually place large orders in the stock market. Such orders can sharply move the price of the stock.

Now let’s get through the actual incident that took place:-

These two fund managers may have used their position to take advantage of likely price movement of a security or asset. They were accused of front running and using insider information about a big transaction in a particular stock. They are said to have taken advantage of that information and invested in that stock through a personal account before the bulk trade was executed.

Let’s understand front running with the help of an example,

Suppose Mr.X and Mr.Y are the fund managers of company A Ltd. They were aware of the information that the company was to invest at a particular stock let us consider it to be SBI shares. Before the company was about to invest, they directed their broker to invest in the SBI shares through their personal or acquaintance’s account. The broker invested in the SBI shares at the nominal rate of 10rupees. Now the fund managers bought the shares under the name of the company and after investing such a lumpsum money in the mutual fund portfolio the price of the stock went up to 18rupees.

Here, the fund managers sold their personal shares at the raised price (i.e., which was 18 rupees in our case) and earned a hefty profit.

Getting back to the actual incident, the insiders say that the lavish lifestyle of one of the fund managers who drives a limited-edition Lamborghini and owns several houses in Mumbai, caught the attention of the fund house and after investigating the transactions on the books of accounts understood the whole case of front running. After the preliminary investigation it indicated front running in 7 funds which are Axis Consumption ETF, Axis Banking ETF, Axis NIFTY ETF, Axis Arbitrage Fund, Axis Quant Fund, Axis Technology ETF and Axis Value Fund that could have facilitated gains of rupees 170 crore.

Insider trading is bad because it gives an unfair advantage to someone on the basis of non-public information. SEBI (Prohibition of Insider Trading) Regulations clearly define the ‘insider’ and what constitutes ‘unpublished price-sensitive information’.

Investors in these funds need not worry as the stocks are of sound quality and new fund managers have come into place. Axis Mutual Fund very ethically reported these managers themselves. New managers have to be more careful now with their own dealings now as everything will be under the scanner.

Axis Mutual Fund has removed Viresh Joshi, head trader and fund manager, from the fund management team of seven of its equity schemes. Deepak Agrawal, equity research analyst and fund manager, has also been removed from the management team of three funds. According to sources, both the fund managers have been suspended and SEBI has been indicated to make a probe to ensure that there is no drop in confidence in the rupees 39 trillion mutual fund industry.