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S. Vaidya Nathan

MOST mutual funds that count, with the exception of UTI Mutual Fund, have a linkage with foreign institutional investors (FIIs). In quite a few cases, the same fund management teams also manage the FII's exposure to Indian equities and its sub-accounts.

In such cases, the portfolio of the FII accounts and the domestic mutual funds do not differ significantly. The Alliance Capital case is no different. Let us assume that the fund management team is interested in buying or selling a stock. In some cases, this may be done simultaneously for the FII and domestic funds. But due to the lack of depth in many stocks, buying or selling has to be phased out.

In such situations, the key question is: Would the fund management team execute orders for the FII accounts first, and then for the domestic fund?

This may well be so, as management of FII funds would be perceived to be of greater significance.

Such actions are not very different from front-running, indulged in by market operators ahead of institutional purchases and sales. If this is the case, the returns for domestic fund could get affected.

This structure of fund management could leave room for controversial decisions by fund managers. This too needs to be looked at by SEBI as this issue figures prominently in the order passed against Mr Samir Arora.

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