Axis Mutual Fund, India's seventh largest asset management company by assets under management (Morningstar), has suspended two fund managers, currently being probed on charges of front-running in the schemes managed by them.
While this took place last Friday, on May 6, the fund's CEO Chadresh Nigam, released a statement, reassuring investors that there are no restrictions on mutual fund redemptions, and that the governance of the mutual fund remains sound. The statement followed widespread speculation that the fund faced more than usual redemptions and would not have the liquidity to meet them.
While the fund is reportedly under the lens of the market regulator Securities and Exchange Board of India by way of a forensic audit, SEBI is also reportedly scanning for other front running instances in the Indian mutual fund industry.
Here's all you need to know about the issue.
1. What is front-running?
This case of front-running means that the fund managers in question - Viresh Joshi and Deepak Agarwal - bought shares in their personal capacity based on price-sensitive information that was available to them but not publicly available. Joshi and Agarwal served as the fund manager and assistant fund manager at Axis Mutual Fund respectively.
The prices of these shares would go up when the fund buys them. The difference between their buy price and the selling price, post the investment by the fund is the profit which is considered to be illegal according to SEBI laws governing mutual funds. Therefore, these individuals used their power and influence over the fund for personal gain.
However, other types of front-running exist too. In late 2021, SEBI investigated cases of brokers buying stocks before recommending them to the public, and selling them after their price went up.
2. What has the quantum of the front-running been?
This information is not public.
However, a source at Axis Mutual Fund told news website The Morning Context that ill-gotten gains due to the front-running was around ₹200 crores.
3. What triggered the investigation?
The explicit and extravagant lifestyle of Joshi prompted him to come under scrutiny as to how he could afford it.
He reportedly drove a Lamborghini, and is described as a "brash individual who enjoyed a good life."
4. What funds have been affected within Axis Mutual Fund?
The statement issued by Nigam said that the funds under these individuals have already been placed under other experienced fund managers, and that the fund has arranged for transactions using other dealers.
The funds in question are largely equity funds and ETFs (exchange traded funds).
Axis Arbitrage, Axis Banking ETF, Axis Consumption ETF, Axis NIFTY ETF, Axis Quant Fund, Axis Value Fund and Axis Technology ETF are reportedly the funds that were associated with these two individuals.
5. Are there any known redemption pressures?
In the run up to the announcement, which took place last Friday, insider sources suggest that the redemption pressures the fund faced was ₹18,000 crores, with nearly ₹6,000 crores flowing out last Thursday.
However, this claim has not been officially verified.
Official data, however, available with Morningstar shows that the fund was a positive performer in the quarter ending March 2022, with its assets under management rising by 0.26% or nearly ₹656.26 crores to nearly ₹25.5 lakhs worth of assets under management.
Any outflows should reflect in the next available data release.
Also Read: Were Axis, HDFC Bank, ICICI Bank PSUs Before Privatisation? A FactCheck