Axis MF suspends two fund managers for front-running. All you need to know

Axis Mutual Fund has suspended two of its fund managers as it probes allegations of irregularities in managing their funds. India’s seventh-largest MF house has also reassigned the responsibilities of the two executives to other fund managers in seven schemes.

The development is the latest scandal to rock India’s fast-growing asset management industry and comes barely two years after Franklin Templeton MF decided to wind up six debt schemes, shaking investors’ confidence in the sector.

Last year, the Securities and Exchange Board of India imposed a penalty on Franklin Templeton MF for irregularities in the running of the six debt schemes and barred it from launching any new debt scheme for two years.

So, who are the suspended executives and what schemes were they managing?

Axis MF has suspended Viresh Joshi and Deepak Agarwal. Joshi had been working with Axis Asset Management Company since 2009 while Agarwal joined Axis AMC in 2015 as an equity research analyst.

Joshi was the fund house’s chief trader and fund manager, and oversaw the fund house’s derivatives trading strategies. He was involved in managing five funds and schemes. These are Axis Arbitrage Fund, Axis Technology ETF, Axis Consumption ETF, Axis Banking ETF, and Axis Nifty ETF. The Arbitrage Fund is the biggest of these schemes, with assets under management of Rs 5,785 crore.

Agarwal was named assistant fund manager two years ago. He had been solely managing the Axis Quant Fund, which has an AUM of Rs 1,530 crore, since last year. He was also involved in running Axis Consumption ETF and Axis Value Fund.

Who will be managing the seven schemes now?

The fund has given the responsibility to manage the banking, consumption and Nifty ETFs as well as the Quant fund solely to Ashish Naik. It has also added Naik in the three-member team that manages the arbitrage fund. Jinesh Gopani will solely manage the Axis Technology ETF and the value fund.

Both Naik and Gopani are veterans in the mutual fund industry and have been with Axis MF for more than a decade each.

What is the AUM of the seven schemes, and how big is Axis MF itself?

The seven schemes have total AUM of over Rs 7,700 crore. Overall, Axis MF manages about Rs 2.6 trillion.

Axis MF’s average AUM jumped 32% to Rs 2.24 trillion for the quarter ended March 2022. This was the highest growth among the top 10 players and higher than the industry average growth of 20%.

The fund house’s AUM grew at a rapid pace after some of its schemes outperformed the market in 2020. These included its flagship large-cap Bluechip Fund, the focused fund, the flexicap fund and the large and mid-cap fund. However, some of these schemes have underperformed over the past few months as the market turned volatile.

Why exactly were Joshi and Agarwal were suspended?

The two executives face allegations of ‘front running’, an illegal practice where a person such as a broker or a fund manager uses their position to benefit from movements in prices of a security.

Such people get insider knowledge of information in advance about a big transaction in a particular stock and then make a large investment in that stock through a personal account before the trade is executed. Once the person executes the large order, the price of the share goes up and the person sells their shares to generate a profit.

Front running is considered a serious offence by the Securities and Exchange Board of India.

Apart from suspending the two fund managers, what else is Axis MF doing?

Axis MF said it has been conducting a suo moto investigation since February to probe potential irregularities. “The AMC has used reputed external advisors to aid the investigation,” the fund house said.

“We take compliance with applicable legal/regulatory requirements seriously, and have zero tolerance towards any instance of non-compliance,” it added.

Has SEBI taken any action so far?

The capital markets regulator has started a preliminary enquiry in the fund’s investment activity for the last two years. SEBI is also likely to question more executives of Axis MF.

“We are examining certain aspects as the initial probe is indicating some kind of nexus between the fund managers and dealers in front-running of stocks,” Business Standard reported, citing a regulatory source.

The report also said that SEBI is looking at certain complaints against some fund managers, who have allegedly made illicit gains in the range of Rs 150 to Rs 200 crore. It added that an independent audit would have to be conducted to determine the quantum of gains made wrongfully.