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

1. lack of documentation of rationale for inter-scheme transfers
2. distribution of dividends without the consent of trustees
3. 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)

• These violations have undoubtedly affected the investor interest.

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