Mutual fund industry expects new Sebi leadership to tighten norms

The Rs 38-trillion mutual funds (MF) industry is expecting further tightening of regulations and streamlining of guidelines following leadership change at the Securities and Exchange Board of India (Sebi).

Industry players say they expect more changes on the debt investment side to safeguard investors. On the equity side, they said Sebi could look to bring down the cost of investing further.

Earlier this month, Madhabi Puri Buch took over as Sebi’s chairperson. In her earlier role as a whole-time member (WTM), she headed the investment management department, which regulates the MF industry.

This week, the government also appointed Ashwani Bhatia as WTM. Bhatia, who previously worked as the managing director–stressed assets and information technology at State Bank of India (SBI), has been appointed for a period of three years. Given his previous experience as CEO of SBI Mutual Fund, industry players say the investment management department could be given to him.

Industry players say they are keenly watching what Sebi does to deepen the corporate bond market.

“The Union finance minister in her Budget speech in 2021 had proposed a body that would purchase investment grade debt securities both during stress and normal times, which helps the bond markets. We are keenly awaiting an announcement in this regard as it would help debt funds in times of stress,” said a CEO of a leading fund house.

Typically, during crises and liquidity crunch, debt funds find it difficult to sell some lower-rated papers. This could force them to halt redemptions to prevent a run.

In April 2020, Franklin Templeton MF wound up six debt schemes due to high redemption pressure and lack of liquidity in the bond market, following the Covid-19 outbreak.

In the last few years, several steps were taken by the capital markets regulator to further safeguard debt funds, which include mandatory 10 per cent investments of net assets in liquid schemes, and the risk classification matrix, which improved labelling and risk framework for debt funds.

There has been a proposal to introduce a swing pricing mechanism to protect MF investors in the event of market dislocation. This mechanism was to be implemented from March 1 but was later deferred to May 1, 2022.

“Looking at the speed at which changes were made post the Franklin Templeton issue we are awaiting more stricter norms in the months to come,” said another senior official from the industry.

In recent years, Sebi has also introduced new rules around  ‘skin in the game’ , where key employees have to invest in the schemes they manage.

The regulator has also lowered the so-called total expense ratio (TER) and introduced various disclosures norms to bring in more transparency.

In 2018, Sebi stated that all scheme-related expenses, including commission paid to distributors, shall necessarily be paid from the scheme only within the regulatory limits and not from the books of the asset management companies (AMCs), its associate, sponsor, trustee or any other entity through any route. This move ensured that foreign trips and junkets to distributors were stopped, say MF officials.

Even AMCs were told to adopt a full trail commission model for all schemes, without payment of any upfront commission, directly or indirectly, in cash or kind, through sponsorships, or any other route.

Many of these changes have impacted the profitability of the MF industry. However, experts say while these norms could cause some pain in the near term, the objective is to build a strong foundation for the industry.