Let sunlight disinfect mutual fund managers

WITHOUT CONTEMPT

The Securities and Exchange Board of India is said to have internally cleared regulations to prescribe fit and proper criteria to regulate individuals who can act as fund managers of mutual funds.

This was long overdue because currently there is complete ambiguity in the approach of the regulator towards this class of professionals in the market.

Not too long ago (but of course under its earlier leadership), SEBI issued directions prohibiting a fund manager from dealing in securities for five years on grounds of alleged insider trading.

The insider trading charges were not personally against him, but against trading on behalf of the mutual fund that had employed him. SEBI also went after him for alleged lapses in compliance with reporting obligations, which too was, by law, the obligation of the trustees of a mutual fund, to be discharged through a compliance officer.

Of course, SEBI lost in appeal before the Securities Appellate Tribunal, but the regulator routinely filed an appeal in the Supreme Court. The very basis of the proceedings having been initiated by SEBI was the alleged fear that the fund manager would start a new mutual fund "� although no person could ever start a new mutual fund without SEBI issuing a registration.

Then, there is the case of a well known stock broker, who is also an astute investor. He had been issued just a show cause notice from SEBI for various alleged violations, which SEBI has now found to be baseless.

However, between the show cause and the final order absolving him, the file travelled across the desks of three Wholetime Members, without resolution.

Meanwhile, every company where he was on the board, whether as an independent director, or as a non-executive director, had to disclose to shareholders/potential investors that this director was accused of violating securities laws. Different officials of SEBI adopted different levels of harshness in imposing these disclosures when these companies made filings of offer documents with SEBI.

More recently, the Central Bureau of Investigation actually filed a chargesheet in a criminal court against a few fund managers working in various mutual funds. The charges against them were alleged criminal breach of trust and criminal conspiracy against a state-owned mutual fund where they had worked as fund managers.

Surprisingly, SEBI has not even asked the mutual funds where they now work, to make disclosures to their unitholders that their fund managers have been criminally charge-sheeted "� not for car parking offence, or for a personal crime of passion, but for alleged criminal breach of trust while working elsewhere as a fund manager.

It is not the intention of this column to even remotely judge the merits of these charges. Nor would this column suggest how their employers ought to react. Whether they were victims, perpetrators, or negligent bystanders is for the criminal trial to establish.

However, the least the regulator could do to protect unitholders who continue to invest money in mutual fund schemes managed by these very fund managers is to get the mutual funds to make disclosures to the unitholders about the chargesheet and its contents. This alone would enable unitholders to make an informed investment decision on whether to trust their money with the same fund managers.

Under the listing agreement, every listed company is required to make disclosures of every material development to the stock exchange so that shareholders or even non-shareholders, who could otherwise purchase shares, would take an informed decision to deal or abstain from dealing in securities of the company.

For a company that is making an IPO, the pendency of a mere show cause notice from SEBI against a non-executive director, leads to wide-ranging disclosures in the offer document.

However, when it comes to existing mutual fund schemes, whose fund managers are currently managing several thousands of crores of investors' funds (not proposing to raise funds like in an IPO), the approach of the regulator is different.

If such fund managers are actually charge-sheeted in a criminal court (not just issued a show cause notice) in connection with their past actions, again in a fund-manager capacity, their current employer mutual funds are not even asked to make disclosures to unitholders.

The SEBI chairman was quoted in a recent interview saying: "Sunlight is the best disinfectant. The more things come out in the open the better." One cannot agree more.

(The author is a partner of JSA, Advocates & Solicitors. The views expressed herein are his own)

email: somasekhar@jsalaw.com