Sebi sceptical about Cadogan views on AMC trustees

The Securities and Exchange Board of India (Sebi) has expressed reservations on the recommendations made by Cadogan Financials on the issue of having professional trustees for asset management companies (AMCs).

Cadogan Financials is an independent overseas consultant for the financial markets.

The finance ministry had asked for a detailed study on the mutual fund segment and the Asian Development Bank had appointed Cadogan Financials to carry out the study. The report was made public last month.

Sebi's reservation is whether professional trustees would accept responsibility for the omissions and commissions of fund houses. "There are some reservations on the issue," Sebi chairman G N Bajpai said.

"If we give over the management to professional trustees, the question is how responsible will they be?"

At present the mutual fund industry has a 3-tier structure which consists of the sponsor, trustees and the AMC with the provision that two-third of the trustees would be independent directors.

Bajpai pointed out that the idea of having independent trustees was to create an objective group which would impart an impartial view to the proceedings. The remaining portion of the trustees are drawn from the sponsoring entity.

The issue of appointing professional trustees to oversee the operations of AMCs has gained view recently, since it has been felt that if the sponsors of AMCs themselves become the trustees, their decisions would be coloured by self interests.

The finance ministry is also learnt to be keen on professionalising the mutual fund sector. This has become more imperative with the recent incident in a branch of Prudential ICICI Mutual Fund, where the branch manager was found to be switching investments made by a provident fund trust from debt to equity schemes.

Refuting the need for professional trustees, Bajpai said the regulator had enough powers to punish trustees for their lapses. "Nothing major has so far erupted," he said.

He pointed out that trustees now have to meet at least six times in a year compared to just four times in a year previously.

The regulations also require 50 per cent of the directors on the board of the AMC being independent, he said.

"The responsibilities of the trustees are clearly laid down and they have to take the onus in case of any lapses by the fund house," he said.

Incidentally, so far Sebi has not proceeded against any trustee for omissions or lapses of its mutual fund management and in the case of Alliance Capital Mutual Fund (ACMF) it penalised the fund house for non-compliance issues.

Sebi, in order not to be caught on the wrong foot, is undertaking inspections of mutual fund accounts twice a year now.