Editorial. IRDAI should tighten investment process for insurers – The Hindu BusinessLine

Clipped from: https://www.thehindubusinessline.com/opinion/editorial/irdai-should-tighten-investment-process-for-insurers/article66800406.ece

The country’s largest life insurer, LIC, should put in place early warning systems to prevent front-running trades

SEBI’s interim order relating to an employee front-running trades of Life Insurance Corporation of India (LIC) shows alarming lapses in the process followed by the insurance behemoth when dealing with clients’ investments. While the stock market regulator has laid down stringent rules for the entire investment process in mutual funds — from decision making to placing orders on exchanges — to prevent fraudulent and unfair trading practices, insurance companies which manage equally substantial amounts of money do not appear to have water-tight rules to prevent such incidents.

LIC has assets under management amounting to ₹41.02-lakh crore, which is 1.5 times the AUM of the entire mutual fund industry. Given the large holdings in the equity portfolio of LIC, its transactions can materially impact stock prices and such information should be guarded well. That LIC has been quite lax in its vigilance is evident from the fact that the front-running alert was originated by SEBI and not through internal checks in the company. It was found that Yogesh Garg, who was initially a bond market dealer and became a dealer in equity market from January 2022, indulged in front-running of LIC’s trades between January 2020 and March 2022. SEBI has been able to establish with records of these trading transactions and bank account details that these were front-running trades which resulted in a gross profit of ₹2.44 crore to Yogesh Garg, his mother, mother-in-law and other entities. While SEBI has banned Garg and his relatives from dealing in stocks until further orders and the profit from the front-running trades is to be impounded, this may not be enough.

LIC continues to employ Garg, though he has been transferred out of the investment department. Garg had access to information about upcoming equity transactions, even while he was working in the fixed income department. As the interim order notes, Garg will be able to “source non-public information pertaining to orders of LIC and continue to engage in fraudulent, manipulative or unfair trade practices including by way of front-running, unless immediate preventive directions are passed” by LIC.

LIC needs to take this issue seriously. The country’s largest life insurer has a fiduciary duty towards 29 crore policy-holders to manage their money well. It should investigate the issue thoroughly, plug systemic loopholes that enabled the front-running and put in place early warning systems to prevent future incidents. As of now, the decision of buying or selling securities and their price, is taken by different committees in LIC. Stocks are selected from the list approved by the committees by fund managers and a daily list is prepared and given to chief dealers for execution. IRDAI should frame standard rules for stocks selection and safeguarding information in insurance companies and tighten the overall investment process.


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