Sebi wants AMCs to be liable for investments

Asset management companies (AMC), as part of a clean-up act in the mutual fund sector, are likely to made liable for all investments, especially those related to provident fund trusts.

The Securities and Exchange Board of India (Sebi) in consultation with the Association of Mutual Funds of India (Amfi) is putting in place a restructuring of the funds sector.

Professionalising the board of trustees is among the priorities. At present, two-third of the members on the board of trustees have to be independent directors. The idea is to make it totally professional or independent of the entity promoting the AMC.

Sebi is also considering a cap on brokerages paid to distributors. Many fund houses, owing to their sheer financial clout, pay higher brokerages to distributors and pressurise the latter to meet mobilisation targets, which leads to mis-selling of products.

Earlier this year, the issue was discussed at an Amfi meeting but the idea had to be canned as it did not meet the approval of the more influential members.

The restructuring also includes a plan to make fund houses more responsible to their investors. Any provident fund trust (or any body which manages retirement money) wishing to change its investments (or instrument of choice) will have to approach the mutual fund armed with a board resolution.

This follows the incident at Pru-ICICI Mutual Fund where investments of a PF trust were moved from gilt to equity and back, which is against the regulations for such trusts.

At present some fund houses ask for such board resolutions from the trusts before making changes in the initial investments.

For instance, PF trusts are allowed to invest only in gilts, but if such a trust did approach a fund house to switch the investments to equities, it is up to the fund house to decide what line it wants to take.

Most funds now believe that it is not their duty to gauge the investment eligibility of such trusts and the latter should be aware of the norms.

However, there is a thinking within the industry that in order to safeguard the mutual funds' interest, the latter should take the responsibility for such investments and specifically ask for a board resolution from the trust ratifying this decision.

This is expected to act as a deterrent to such switching - if taken arbitrarily - while it is also expected to provide a safeguard to the fund-house in case it is accused of malpractice.

Switching between schemes is common in the mutual fund sector as investors migrate from debt to gilt to equity. However, most investors are not bound by any regulations to invest in only one category of instruments unlike PF trsuts or those managing pension money.