Violations in Mutual Fund Houses

What is the issue?

The deteriorating governance standard in the mutual fund industry calls for a scrutiny.
It is high time that SEBI respond appropriately to the serious violations in mutual fund houses.

What are the recent incidents?

Conflict of interest issues surfaced in HDFC Mutual Fund’s shares allotment to its distributors ahead of its IPO (Initial Public Offering).
It also occurred in ICICI Mutual Fund’s alleged move to bail out ICICI Securities when the latter’s IPO was unhealthy.
SEBI recently gathered the mutual fund trustees for a meeting, after a series of violations by fund houses.
It includes operational violations such as laxity in collection of KYC documents or inappropriate apportioning of advertising expenses.
It also includes more serious violations such as

lack of documentation of rationale for inter-scheme transfers
distribution of dividends without the consent of trustees
denying investors the correct Net asset value (value per share of a mutual fund or an exchange-traded fund on a specific date or time)

What are the concerns?

Response - SEBI was correct in expressing disapproval of the trustees, as they are the first level regulators in mutual funds.
However, there is a concern that SEBI had been too slow to react to the violations.
It was less responsive to the violations during an inspection carried out between April 2014 and March 2016.
It is to be noted that about 60% of investors in equity funds and 70% in non-equity funds do not stick on beyond two years.
So continuous reshuffle of investors necessitates quick actions by the regulators, in case of violations, to protect investors' rights.

Trustees - Assets under management for mutual funds have trebled to Rs.23 lakh crore in the last five years.
Given this, the role of trustees in protecting investor interest is of utmost importance.
SEBI (Mutual Fund) Regulations, 1996 endows trustees with the power to take necessary remedial steps for violations in the conduct of the business.
SEBI must ensure that trustees take their jobs more seriously in protecting investors’ interests.
Compliance officers - Trustees are one of the layers of the three-tier structure under which mutual funds work.
The other two are the sponsor and asset management companies (AMC).
Compliance officers work inside the asset management companies.
They are responsible for monitoring compliance of the Act and other rules and regulations.
They are better placed to spot the operational irregularities.
So besides trustees, the responsibility of the compliance officers should also be looked into.

What is the way forward?

SEBI needs to take its findings to the logical conclusion by holding fund houses and compliance officers accountable.
Where possible, remedial action to protect investor interests needs to be taken.
This should be followed by the penal action against the concerned fund houses.

Source: BusinessLine