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Insurers, banks order probes in the wake of Axis Mutual Fund controversy

Many insurance firms and a few banks have hired forensic investigators to look into their systems’ weaknesses on concerns that their treasury staff may have engaged in front running or insider trading, similar to what happened at Axis Mutual Fund.

After reports that two Axis MF executives were implicated in front running – or, purchasing or selling shares based on non-public information that could impact the price of the share – came out, most of the major private insurance companies have started investigations to check the prospect of any employee exploiting their systems, people aware of the development said.

Treasury departments of large banks and insurance companies sit on huge piles of cash and have exposure to stock and currency markets. Companies fear some employees may be buying stocks or taking positions in currency markets based on insider information available to them.

“The fear is that there could be a nexus or an ecosystem between some mutual funds and certain executives working in the treasury department (of insurers or banks),” a person with direct knowledge of the matter said. “That is, whether information was shared among some people, including the ones sitting in the treasury department.”

Another person who is conducting such investigations said the fear is also that Sebi may widen its investigation into the Axis MF scandal.

“If these companies or banks are named in these investigations, they could be questioned too,” he said. “And some of these companies and banks want to figure out themselves before any of that.”

KV Karthik, partner, financial advisory, at Deloitte India, said, “Treasury departments in insurance companies undertake substantial volumes of trading, including that in the stock market. Many companies therefore choose to proactively monitor their executives’ compliance with conduct-related issues including front running or insider trading.”

Many businesses and banks want to know if their internal systems have been hacked in any way, who had access to insider information about the transactions, and whether they used it to earn money.

In the case of Axis Mutual Fund, the accused allegedly bought stocks in their personal account just before the mutual fund bought the same stocks. When the fund bought these stocks, the price went up, benefiting the accused.

Industry insiders said the market regulator is already looking at a couple of mutual funds other than Axis MF to see if there was any instance of front running or insider trading.

“The investigators are looking at certain patterns when it comes to executives working in the treasury department…(such as) any spurt in their income or expenses, bank or stock market transactions that raise any red flags,” said a person close to the development.

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