Axis Mutual Fund is the country's seventh-largest fund house, and was recently in the limelight for suspending two fund managers, Viresh Joshi and Deepak Agrawal, on 4 May. The two managers were suspended on allegations of "front running".
What is front running?
Front running is an illegal and unethical practice in which a trader acts on inside information. Insider trading is done by a company's employees aiming to profit from dealing in the company's own shares; front running can be done in just about any stock, by people who know how some large investors plan to trade in the market. Insiders can use the accounts of their associates to execute such trades.
In this case, the two fund managers allegedly took advantage of their knowledge of the orders the fund had lined up, and tried to profit from it.
The role of a mutual fund manager
A fund manager is in charge of placing orders and buying or selling individual stocks and bonds, designing the portfolio from the pool of money gathered from investors. Mutual funds usually place large orders in the stock market, and such orders can sharply move a stock's price.
What happened
The two fund managers may have used their position to take advantage of the likely price movement of a security. They were accused of front running: using inside information about a big transaction in a particular stock to invest in that stock through a personal account before the bulk trade was executed.
Front running, by example
Suppose Mr. X and Mr. Y are the fund managers of A Ltd. They know the company is about to invest in a particular stock, say SBI shares. Before it does, they direct their broker to buy SBI shares through their own or an acquaintance's account, at 10 rupees a share. The fund then buys the shares in bulk for its portfolio, and the price rises to 18 rupees.
The fund managers sell their personal shares at the higher price (18 rupees in our example) and earn a hefty profit.
Back to the incident
According to insiders, the lavish lifestyle of one of the fund managers caught the attention of the fund house, and an investigation of the transactions uncovered the front running. The preliminary investigation pointed to front running in seven funds: Axis Consumption ETF, Axis Banking ETF, Axis NIFTY ETF, Axis Arbitrage Fund, Axis Quant Fund, Axis Technology ETF and Axis Value Fund, which could have facilitated gains of 170 crore rupees.
Insider trading is wrong because it gives someone an unfair advantage based on information that isn't public. SEBI's (Prohibition of Insider Trading) Regulations clearly define who an "insider" is and what counts as "unpublished price-sensitive information".
What it means for investors
Investors in these funds need not worry: the stocks are of sound quality, and new fund managers have taken over. Axis Mutual Fund reported the managers itself, and new managers will now have to be more careful with their own dealings, as everything will be under the scanner.
Axis Mutual Fund 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, was also removed from the management team of three funds. According to sources, both fund managers were suspended, and SEBI was expected to investigate to make sure confidence in the ₹39 trillion mutual fund industry did not suffer.