Explained: What is front running, which led Axis AMC to suspend 2 fund managers?

What is front running?

Front-running, which is illegal in India, involves purchasing a stock based on advance non-public information regarding an expected large transaction that will affect the price of the share. When mutual funds make a big order, some fund managers buy the same shares in their personal accounts before executing the MFs’ order. When MFs purchase in huge quantities, the price of the share is expected to go up.

Sebi has categorised front running as a form of market manipulation and insider trading because a person who commits a front running activity expects security’s price movements based on the non-public information. Sebi has investigated and penalised several fund houses and fund managers in the past for front-running.

Is it common in India?

According to market sources, front-running has been very common in mutual fund houses and foreign portfolio investors. In December 2021, a fund manager of Deutsche Mutual Fund and his parents paid nearly Rs 5 crore to settle with the Sebi, a case of alleged front running in the trades of the mutual fund. The amount remitted by them included settlement charges, wrongful gains and interest charged on the ill-gotten gains.

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What action has Axis MF taken?

According to Axis AMC, as part of the process, two fund managers have been suspended pending investigation of potential irregularities.

“We take compliance with applicable legal/regulatory requirements seriously, and have zero tolerance towards any instance of non-compliance,” the fund house said in a statement.

“Axis AMC has been conducting a suo moto investigation over the last two months (since February 2022). The AMC has used reputed external advisors to aid the investigation,” the AMC added.