SEBI STEPS UP MUTUAL FUND REFORMS

It’s now time for the Securities & Exchange Board of India (Sebi) to focus on key reforms in the mutual fund (MF) sector. Sebi will call a rare meeting of all MF trustees, possibly by the end of this month, to discuss their role in detail and areas of conflict, if any. The regulator sees the role of trustees as critical to the proper functioning of MFs.
Sebi has also appointed SA Dave, former chairman of Unit Trust of India and a highly regarded personality in the financial sector, as chairman of its mutual funds advisory committee. The panel will comprise leading names from the funds industry and investor associations. The first meeting of the panel will also be held soon, sources in Sebi said. The MF panel will be the third of Sebi’s advisory committees, after those for the primary and secondary markets.
The meeting between Sebi and the MF trustees is the latest step by Sebi chairman CB Bhave to push through further reform in the capital markets. In a volatile market environment, MFs are seen as critical to getting retail investors into the capital market.
The role of trustees is akin to that of independent directors on company boards, and Sebi regulations on MFs places enormous emphasis on trustees to ensure the proper and orderly functioning of asset management companies (AMCs). A trustee company and AMC are expected to be at arm’s length, and trust-ees are meant to keep close watch on the AMC’s functioning. Sebi’s MF regulations specify that trustees must be people of “ability, integrity and standing”.
However, of late, sections of the market and MF industry itself have said there are cases where the independence of trustees is being severely diluted and that they have been reduced to mere figureheads or rubber stamps, endangering the functioning of AMCs. Sebi sources admitted there were cases that needed to be examined. Even MF chiefs agree that in cases, trustees may not have discharged their duties properly.
UK Sinha, chairman of UTI Mutual Fund, which is owned by four state-run institutions, said: “In the case of some fund houses, the trustees have no role at all, and are there merely as a formality. In some cases, the AMC and trustee boards even hold joint meetings, which is wrong and undermines the role of the trustees. Trustees often clear the AMC’s plans without the necessary due diligence.”
However, AP Kurian, chairman of the Association...
of Mutual Funds in India, denied there were any problems relating to the role of trustees and said they were performing their role diligently. “Trustees meet once in two months, do their due diligence before signing off the reports. We see trustees as first-level regulators. Schemes are approved by them, and the AMCs report to them,” Kurian added.
Sebi’s MF regulations clearly lay down the eligibility criteria for trustees. According to regulations, trustees “shall have a right to obtain from the asset management company such information as is considered necessary by the trustees”. The trustees must also ensure that before any scheme is launched, the AMC has the necessary systems in place; appointed all key personnel, auditors, a compliance officer and registrars; as well as prepared a compliance manual and designed internal control & audit mechanisms. They are also expected to ensure that specified norms for the empanelment of brokers and marketing agents have been complied with.
“The trustees shall ensure that an asset management company has been diligent in empanelling the brokers, in monitoring securities transactions with brokers and avoiding undue concentration of business with any broker. The trustees shall ensure that the asset management company has not given any undue or unfair advantage to any associates or dealt with any of the associates of the asset management company in any manner detrimental to interest of the unit holders,” state the Sebi regulations. The trustees have to ensure that the AMC has managed the MF schemes independently of other activities and taken adequate steps to ensure that the interests of investors of one scheme are not compromised by those of any other scheme or by other activities of the AMC....