The Securities and Exchange Board of India (SEBI) is reportedly probing alleged irregularities in the management and investment practices of Quant Mutual Fund. A search and seizure operation was conducted at locations in Mumbai and Hyderabad, according to a Moneycontrol report.
Quant dealers and people connected with the case were questioned on Friday, the report added.
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Here's an explainer on what is unfolding at one of India’s largest asset managers, which has been a key beneficiary of the surging inflows into stock market from retail investors.
What is Quant Mutual Fund saying about it?
Quant Mutual Fund in a letter has confirmed receiving inquiries from SEBI regarding these allegations. In a communication to its investors, Quant stated, "We will provide all necessary support and continue to furnish data to SEBI on a regular and as-needed basis." The fund house, which has seen rapid growth from managing Rs 100 crore in 2019 to over Rs 93,000 crore currently, is now under scrutiny for its internal practices.
So what exactly is Front-Running?
At the core of SEBI’s investigation is the practice of front-running. Front-running occurs when a mutual fund manager or trader executes orders on a security for their own account before executing orders for their clients. This gives the trader an unfair advantage, as they can profit from the expected movement in the security’s price, which results from the larger orders that follow.
How bad is this practice?
Front-running is considered highly unethical and illegal because it exploits confidential information and undermines market integrity. It breaches the trust and fiduciary duty that fund managers owe to their clients. Regulatory bodies such as SEBI have enforced strict rules to prevent such practices to ensure fair and transparent markets.
How worried should investors be?
For ordinary investors, front-running can lead to several negative outcomes:
- Higher Costs: Investors might end up paying more for securities due to artificial price movements caused by front-running.
- Less Favorable Prices: The advantage held by front-runners often results in worse trade execution prices for regular investors.
- Erosion of Confidence: When such practices come to light, it shakes investor confidence in the fairness and integrity of the financial markets.
SEBI's reported action Quant Mutual Fund highlights its commitment to maintaining market fairness. This is not the first time SEBI has taken such actions; in 2022, a similar investigation into Axis Mutual Fund for front-running resulted in 21 entities being barred from accessing capital markets.
What will be the consequences of this?
The report may also weigh on some smaller stocks held by the fund, such as lender RBL Bank Ltd., drug maker Aarti Pharmalabs Ltd. and metal machinery maker Ador Welding Ltd.If Quant Mutual Fund or any of its individuals are found guilty of front-running, they face severe penalties, including fines, suspension, and possible legal action.
