How Axis' Front Running Trading Scandal Is Poised To Shake Up India¡¯s $465 Billion Mutual Fund Industry

A front-running scandal involving Axis Asset Management Co., which is India¡¯s seventh-largest mutual fund manager, is poised to shake up the nation¡¯s $465 billion mutual fund industry.

The company, partly owned by British multinational asset management company Schroders, had in May 2022 sacked two employees, including its chief dealer, amid an ongoing internal probe for the alleged scandal, as per a Bloomberg report.

The mutual fund company in early July submitted its findings to regulators and said it had evidence to believe that the terminated executives had violated securities law. Meanwhile, the Securities & Exchange Board of India (SEBI) has been carrying out its own investigation into potential front-running by the two men, a person familiar with the agency¡¯s probe said.

For the uninitiated, front-running is the trading of stocks by someone privy to information about a large client order or transaction that is upcoming and will move prices, thus providing significant gains to the people with such sensitive information. This practise is illegal in India.

The massive search and seizure operations were conducted by the market regulator at the offices and residences of Axis Mutual Fund executives, and other stock brokers and traders, the person said, as per Bloomberg.

In all, the regulator¡¯s probe covered 30 locations in different cities after it received surveillance alerts and input from the stock exchange about suspected front running in trades of Axis Mutual Fund by certain parties, the person said.

British investment giant Schroders holds a 25% stake in Axis Asset Management, with Axis Bank Ltd holding the rest.

Following the allegations, some corporations have reportedly withdrawn money from Axis. Axis Mutual Fund said in a public statement that the firm has followed regulatory guidelines at all times and believes that the conduct of the concerned individuals doesn¡¯t have any impact on its liquidity or operations.

The Sacked Employees

linkedin/Viresh Joshi

Viresh Joshi, the former chief dealer, has filed a lawsuit alleging wrongful termination and has sought Rs 542.6 million, his legal firm Mansukhlal Hiralal & Co. said in an email, as per Bloomberg. The other employee named by the firm is fund manager Deepak Agrawal who was fired over irregularities, including front-running the AMC¡¯s transactions, similar to the case of chief dealer Joshi.

Viresh Joshi was amongst the early members of Axis Mutual Fund, which had joined the industry with its first investment plan in 2009, and had Rs 2.5 trillion of assets under management at the end of June this year. He worked with Axis Mutual Fund from July 2009 to May 2022.

The report stated that Axis Mutual Fund, in an emailed response, said the fund house will address the assertions made by Joshi in his lawsuit before the court.

¡°We have more than adequate findings concerning breaches of our policies, including non-cooperation with our internal investigation (during his suspension period). We also have strong reasons to believe that there have been serious and persistent breaches of securities laws by him,¡± the company said in its response.

As per a Mint report, Joshi was sacked on multiple grounds, including an unwillingness to cooperate during the company¡¯s investigation and explain the source of his income and assets, making allegedly incorrect claims of coercion, and not explaining a whistleblower¡¯s email accusing him of front-running.

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More Scrutiny In $465 Billion MF Sector?

Amid the front-running scandal, legal experts are meanwhile predicting more scrutiny for the entire Indian mutual fund industry, as per Bloomberg. There have been reports of the market regulator SEBI dealing with more of such front-running cases besides this Axis one.

Mutual funds, which fall somewhere between high-risk stock trading and low-return bank deposits, have offered an attractive proposition to both young and risk-averse older investors in India. The industry has grown nearly five-fold in the last decade, with over 37 trillion rupees ($465 billion) in assets at the end of June, according to the Association of Mutual Funds In India (AMFI).

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