Why has SEBI proposed tightening responsibilities of mutual funds trustees?
Mumbai, February 13, 2023
Besides, the regulators also put forward some recommendations to enhance the accountability of the board of asset management companies (AMC).
The capital markets regulator Securities and Exchange Board of India (SEBI) recently proposed to review the role and accountability of trustees of mutual funds with an aim to protect unitholders’ interests. Besides, the regulators also put forward some recommendations to enhance the accountability of the board of asset management companies (AMC).
What is the role of Trustees?
Mutual funds in India have a three-tiered structure – mutual fund, the trustees and the AMC. Board of trustees or trustee company holds the property of the mutual fund in trust for the benefit of the unit holders. They appoint an AMC to float schemes for the mutual fund and manage the funds mobilised under various schemes.
They are also expected to exercise supervisory oversight over AMC and its activities so as to ensure that AMC acts in the interest of the unitholders.
What has SEBI proposed?
Sebi has recommended that the trustees will be responsible for taking steps so that there are system-level checks in place to prevent fraudulent transactions. To ensure that they focus on their core responsibilities, Sebi has proposed that the trustees should take help of audit, legal firms and merchant bankers for carrying out due diligence on their behalf.
Sebi has also recommended amending certain regulations for AMC and also include additional clauses to enhance the role, responsibility and accountability of the board of AMC. The markets regulator also proposed the constitution of a ‘Unit Holder Protection Committee’ (UHPC) by board of AMC. This will help in an independent review mechanism for the decisions of AMC from the perspective of the unit holders’ interest, across all products and services.
In order to strengthen governance and for financial independence, Sebi also suggested that all the existing trustees with board of trustees structure should convert into a trustee company in the next one year.
Why this tightening of responsibilities of trustees now?
According to Sebi, though mutual fund regulations provide for some restrictions to address few conflicts of interest, there are some areas where the Trustees need to pay attention.
Some of the potential conflicts include investment by mutual fund (MF) schemes in public issues of its sponsor, its associates and/or group companies; investment by MF schemes for fund raising activates by such companies where its sponsor, associates or group companies are appointed as merchant banker; sponsor influencing voting by MF schemes in companies in which it has interest and MF availing services of its sponsor, associates and group companies at terms which are not at arm’s length.
How will it benefit unit holders?
Sebi said with increasing scale and reach of the mutual fund industry, trustees’ role in respect of unitholders’ protection assumes even greater significance. Once finalised, the trustees will ensure that the AMCs act in a manner which is not skewed in favour of AMC’s stakeholders.
The key areas of their focus will be fairness of fees and expenses charged by the AMC and misconduct including market abuse / misuse of information by the AMC or AMC employees or distributors. The trustees will ensure that there is no mis-selling of mutual fund schemes to increase asset under management (AUM) and valuation of the AMC.
What is the size of the mutual fund industry?
Over the past decade, there has been a fivefold increase in the size of the mutual fund industry i.e. from the industry’s AUM of Rs 7.93 lakh crore in November 30, 2012, the AUM crossed the milestone of Rs 10 lakh crore in May 2014 and in the span of about three years it had crossed Rs 20 lakh crore in August 2017. The size of industry AUM crossed Rs 30 lakh crore in November 2020 and as of December 31, 2022 it stood at Rs 39.89 lakh crore.
[The Indian Express]
