Mutual Fund Units Are Now Covered Under Insider Trading Regulations — What Changed and Why It Matters
For years, there was a genuine, legally significant gap in Indian securities regulation: the SEBI (Prohibition of Insider Trading) Regulations, 2015, which govern trading in shares, bonds, and other securities while in possession of unpublished price-sensitive information, explicitly excluded mutual fund units from the definition of "securities" for this purpose. That gap has now been closed — and most investors have no idea it existed, let alone that it changed.
The Amendment
Following a November 2022 notification and subsequent implementation circulars, mutual fund units were formally brought within the scope of the SEBI (Prohibition of Insider Trading) Regulations, 2015, effective from November 1, 2024. This means individuals with privileged, non-public information about a mutual fund scheme — its impending large trades, a significant redemption event, or other information capable of materially affecting the scheme's NAV or unit holders' interests — are now subject to insider trading prohibitions, structurally similar to those long applicable to listed company insiders.
Why This Gap Mattered
Fund managers, dealers, and senior AMC personnel routinely have advance knowledge of information that could affect a scheme's NAV — an imminent large redemption that will force distressed selling, a large incoming subscription that will meaningfully change portfolio composition, or knowledge of an impending change in a scheme's fundamental attributes. Before this amendment, an AMC insider trading personally in that scheme's own units using such advance knowledge fell into a genuine regulatory grey zone, governed only by the AMC's own internal Code of Conduct under the Mutual Funds Regulations, rather than by the more stringent, specifically designed insider trading regime.
Chapter IIA: The New Framework Specific to Mutual Fund Units
Rather than simply folding mutual fund units into the existing PIT framework wholesale, SEBI inserted a new Chapter IIA into the PIT Regulations — "Restrictions on Communication in Relation to and Trading by Insiders in the Units of Mutual Funds" — deliberately calibrated to the specific nature of mutual fund units rather than applying the full listed-company insider trading apparatus without adjustment. This reflects a considered regulatory view: UPSI in relation to mutual fund units is defined narrowly, covering information specifically pertaining to a scheme that could materially impact NAV or materially affect unit holder interests, rather than the broader definition applicable to listed companies.
Schedule B1: The Minimum Code of Conduct
A new Schedule B1 sets out minimum standards for the code of conduct AMCs must implement to regulate, monitor, and report trading by "Designated Persons" in the units of their own mutual fund schemes, including:
- The Compliance Officer must report on this specifically to the AMC board and the audit committee chairman, at least annually.
- Chinese wall procedures must be implemented, ensuring UPSI doesn't flow to individuals without a legitimate need for it.
- Pre-clearance requirements — designated persons must obtain compliance officer clearance before trading, and declare they are not in possession of UPSI at the time.
- A prescribed timeframe for executing pre-cleared trades (not exceeding seven business days), after which fresh clearance is required.
- A minimum contra-trade restriction period (not less than two months) — a designated person permitted to trade cannot reverse that trade within this window.
- Designated persons must disclose names and PANs of individuals with whom they share material financial relationships.
Why This Matters
This amendment closed a real regulatory gap that had persisted for years despite mutual funds managing trillions of rupees of public money — and it means AMC compliance functions now carry a genuinely new, specific obligation: administering an insider trading code for their own scheme units, not just the broader securities-trading code of conduct that already existed under the Mutual Funds Regulations.
How Anuj Desai & Associates Can Help
We help AMCs build and audit the Schedule B1-compliant code of conduct now required for insider trading in their own scheme units — including Chinese wall documentation, pre-clearance workflow design, and Compliance Officer reporting structure. If your AMC hasn't yet formally implemented this Chapter IIA framework, this is a genuine compliance gap worth closing promptly.