Mutual fund schemes have no business to turn in consistently poor performance, of the kind seen over the past three years, says the capital markets regulator.
The Securities and Exchange Board of India (Sebi) will ask executives of the asset management companies (AMCs) in question to take remedial measures. These executives include the AMCs' chief executive officers (CEOs), fund managers and also the trustees.
According to the regulator, almost half the schemes of the industry's 18 fund houses have performed poorer than their respective benchmarks over the past three years. Said U K Sinha, chairman, Sebi, “There are nine fund houses where over a period of three years, 50-100 per cent of their schemes have performed less than the benchmarks.” Further, up to 50 per cent of schemes of another nine AMCs had underperformed their benchmarks. "This should be a cause of concern for those AMCs and I hope the trustees have taken note of it," added Sinha, who was speaking at a conference on MFs organised by the Confederation of Indian Industry.
“We are going to engage those fund managers and CEOs about what measures they are proposing to take,” he said. “If it is happening on a continuous basis for a significant percentage of schemes, then it becomes an issue for Sebi.”
Sinha said in some cases, assets received by a scheme had been invested in fixed deposits of a bank which was a unit-holder in the scheme. "In some cases, inter-scheme transfers have been made mainly to transfer the losses from one scheme to another and in some cases, more than 25 per cent (of the schemes' assets) is being invested by one particular investor," Sinha pinpointed. This was not an industry-wide practice, he added, but Sebi could not overlook such developments.
New rules
Regarding suggestions on issues ailing the growth of the fund market, Sinha said the regulator would soon decide on the suggestions of investors’ associations and other stakeholders in this regard. These suggestions cover fungibility in the total expense ratio, single-cheque payment for both investments as well as advisory services, distribution regulations and re-introduction of entry load or variable entry load, among others. Sinha hinted that entry load might not come back, as a vast majority of suggestions did not recommend its return.
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"Based on those suggestions, we will be coming out with distribution regulations and also the regulation of independent financial advisors. However, Sebi's preference would be to go in for an self-regulatory organisation (SRO) model. If some capital support is required in setting up an SRO, Sebi will be willing to provide that as well," said Sinha.
On proposed changes in Initial Public Offer (IPO) guidelines, Sebi was working on a detailed set of rules, likely to be finalised in two to three months. "What we intend to do is increase the reach and penetration of IPOs, while ensuring investors' protection by way of some sort of safety margins," he explained.
Sinha emphasised that Sebi's job was to ensure that rules of the game are being enforced. “But it's not a question of making more and more regulatory over-drive or disclosures only for the mutual fund industry, but across the board. It is our legal and moral duty to intervene...interest of the investors cannot be compromised.”
Pension schemes
On guidelines for pension schemes, the chairman said nothing prevented an asset manager from coming to Sebi and seeking approval for an MF scheme having pension funds as its theme. "What perhaps will come in the way of the particular scheme is whether the scheme will qualify for tax-exemption or not. But that is not an issue Sebi can tackle;.tax authorities will have to clarify. Sebi is willing to recommend to the government that if it is a pension scheme, it should get similar treatment," he said.
The regulator is in touch with the tax authorities on this and related subjects, he said."There has to be similar treatment of schemes if they are long-term, pension-oriented and we have been assured or given to understand that whenever the Direct Taxes Code comes in, the treatment of pension schemes managed by mutual funds or others will be similar," said Sinha.