The Securities and Exchange Board of India (Sebi) is finalising a second round of reforms for the mutual fund (MF) industry. The regulator is considering a slew of measures intended to protect investors’ interests and to ensure that fund houses have smoother and better regulated operations. Sebi had announced investment norms for liquid funds and regulations for fixed maturities plans (FMPs) after last October’s liquidity crisis when funds faced heavy redemption. It had earlier proposed that investors write a separate cheque for commissions paid to fund distributors in addition to the usual investment cheque in the name of the fund house. Although distributors did not support this idea, Sebi favours the separate cheque system as distributors will get a commission based on the services they render.
At present, asset management companies (AMCs) pay the distributors directly with investors bearing an entry load. There is a disconnect in this system as distributors are directly paid by fund houses for services they are supposed to provide to investors. If approved, the proposal is expected to end up reducing the commission as investors would prefer to negotiate the same, depending on the services they receive. Sources at Sebi point out that stock brokers were earlier charging huge commissions. It was only after competition increased that the rates automatically reduced, but the brokers have still survived. The Association of Mutual Funds in India (Amfi), on its part, is working on an alternative arrangement and will soon submit three options to Sebi based on the experience overseas.
Last October’s liquidity crisis had also raised the issue of increasing networth requirements for AMCs from Rs 10 crore at present to Rs 50 crore. The idea was that, in case of huge losses, the high networth requirements would help a fund to survive its problems. The argument against this was that some of the fund managers had floated mutual funds and high networth criteria may hinder such ventures. The view gaining currency now within the regulator is that assets under management of mutual funds floated by fund managers are not that big and, hence, increasing the networth requirement is important. Also, last October’s crisis saw most of the redemption pressure coming from corporates. As a result, the regulator may ask funds to float separate schemes for corporates and non-corporate investors. Sebi is also overhauling the seven-year-old risk management circular for mutual funds. The proposed amendments would focus on improving governance and risk management practices. Sebi is also insisting on separate portfolio and operation functions, proper empowerment for persons supervising risk management, ensuring that investments are carried out as per what is mentioned in offer documents and that investments follow established norms, among others.
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