The two suspended fund managers of Axis Mutual Fund allegedly shared confidential information about the asset manager’s trades with brokers in Gujarat in return for kickbacks, according to new details discovered by a Securities and Exchange Board of India (Sebi) investigation.
“Tips were apparently shared through WhatsApp and screenshots of internal Bloomberg chats. The information shared with outside brokers was used by seven entities in Gujarat who traded on these tips in large numbers. Some of these entities were shell companies,” a person with knowledge of the matter said, requesting anonymity.
Sebi has been piecing together the modus operandi of the rogue fund managers using a preliminary probe report submitted by the board of Axis Mutual Fund, information collected from stock exchanges and its own investigation of the trading patterns of the Axis Mutual Fund officials, a second person with knowledge of the matter said.
Axis Mutual Fund’s preliminary report on the front-running scam found that the suspended fund managers—Viresh Joshi and Deepak Agarwal—had assets disproportionate to their known income and violated Sebi’s code of conduct for fund managers and dealers.
Axis Asset Management Co. Ltd, which runs the mutual fund, has hired management consultant Alvarez and Marsal and law firm AZB & Partners to look into the conduct of the fund managers, the first person said.
Front-running, or the practice of trading in securities ahead of large client orders, is a serious securities market offence. It not only erodes customers’ trust but can also lead to losses or inferior prices for customers. Mutual funds typically place large orders, and such transactions can sway securities prices, allowing people with information about the trades to make outsized gains.
As part of its probe, Sebi last week took details of these officials’ emails and trade details of their connected entities (family members are included in the definition of connected entities), the person added.
Joshi was the head dealer and fund manager of five mutual fund schemes at Axis Mutual Fund, while Agarwal was the equity research analyst and fund manager for three mutual fund schemes.
Sebi’s probe, separate from what the asset manager is undertaking, will also examine the activities of other fund managers and officials of the asset manager, the first person added.
In response to a query about Sebi broadening its investigation into the irregularities at Axis Mutual Fund, the company spokesperson said the asset manager has been conducting an internal probe since February and can’t comment on any specific regulatory action at this stage. “Media is requested not to give credence to market speculations. All other fund managers mentioned in your email (excluding Joshi and Agrawal) continue to discharge their official responsibilities in their respective capacities,” the spokesperson said in an emailed response.
An emailed query to a Sebi spokesperson remained unanswered till press time.
The other reason prompting the regulator to broaden its investigation is a probe that it started four years ago on how fund managers can violate the code of conduct to make illegal gains. “Sebi still hasn’t closed the case. There was some information that a trader (at Axis) was doing something wrong. The company had started the review from an internal controls’ perspective,” he added.
In October 2020, Sebi laid down the code of conduct rules for fund managers and dealers.
“Dealers and fund managers shall not indulge in any unethical business activities, or professional misconduct involving dishonesty, fraud or deceit, or commit any act that could damage the reputation of the organization,” the code of conduct states.
Sebi further said the chief executive of the fund house would be responsible for ensuring that fund managers and dealers follow the code of conduct. The regulator is not ruling out action against chief executive Chandresh Nigam as it is the responsibility of the head of the company to adhere to the code of conduct, the first person said.