Rs 40-trillion MF industry braces for industry-wide forensic audit

AMCs term it from 'positive development' to 'preventive exercise'

The Rs 40-trillion mutual fund (MF) industry is bracing for a comprehensive audit — a move aimed at boosting investor confidence. In a first, the Securities and Exchange Board of India (Sebi) has invited Expression of Interest (EoI) for empanelment of forensic auditors, specifically for MFs.

Industry executives say that the regulator is likely to be preparing for the extensive exercise to safeguard the interests of retail investors as the industry embarks on a stronger growth path. "The regulator is likely to conduct an industry wide audit. It's a positive development, given the surging assets under management (AUM). The time is ripe to put in the checks and balances," said chief executive officer of a large fund house, who didn’t wish to be named.

The MF industry has grown six fold in the last 12 years and its AUM has jumped from Rs 6.7 trillion at the end of 2010 to Rs 40.7 trillion at the end of 2022.

On Saturday, the markets regulator put out an advertisement inviting EoI from forensic auditors in conducting an audit of mutual funds, asset management companies (AMCs), trustee companies and board of trustees.

While the advertisement does not disclose plans for an industry-wide audit, expectations of such an exercise stems from the watchdog's recent moves to step up the vigil on the industry.

The invitation of EOIs came a day after Sebi proposed to increase the role and accountability of the trustees in a bid to safeguard unitholders' interest.

In order to have an independent review mechanism for the decisions of AMCs from the perspective of the unitholders' interest across all products and services, Sebi, on February 10, proposed to mandate that a "Unit Holder Protection Committee (UHPC) should be constituted by board of AMC".

In its consultation paper, the market watchdog had suggested that trustees of MFs should be vigilant and keep an eye on market abuse by AMCs and their employees and mis-selling by AMCs to increase the asset base.

The regular has conducted forensic audits of fund houses in the past too but only when there was any information of wrongdoing. "Till now, Sebi used to audit fund houses only when there was any information of misconduct. Now, this may become a preventive exercise," said CEO of another AMC.