businessman cover his money with umbrella
businessman cover his money with umbrella

SEBI regulation of MFs basically consists of two functions: the regulation of assets management and the regulation of the marketing of schemes, writes TENSING RODRIGUES.

SEBI is mandated to regulate the mutual funds; “In exercise of the powers conferred by section 30, read with clause (c) of sub-section (2) of section 11 of the Securities and Exchange Board of India Act, 1992 (15 of 1992)”, it solemnly declares, “the Securities and Exchange Board of India hereby”  issues the Mutual Funds Regulations, 1996. Though SEBI does not categorically say that the intent of the regulationis to protect the investor, as a mutual fund investor, I have always believed that I have a right to expect SEBI to protect my interest.  But often I doubt my belief; I wonder whether SEBI is protecting my interest or whether it is running its own agenda.

SEBI regulation of MFs basically consists of two functions: the regulation of assets management and the regulation of the marketing of schemes. The first function is merely an extension of its primary task: the regulation of the overall securities market. Though I would not accept that SEBI has had a clean record in this task, I would not deal with that here. I will only say that it has not been entirely above board, because of the opaque and erratic manner in which it has dealt with the defaulters. It has been fairly stern with the AMCs that have erred. But it has been not so diligent with the market players in the rest of the stock market; the MF investors’ interest has therefore been definitely hurt.

For instance, SEBI’s order to liquidate Pyramid Saimira caused huge losses to investors; a change in management might have served the investors’ interest better. This in spite of the fact that a SEBI managercolluded with a market operator to fabricate an official SEBI letter to Pyramid Saimira asking it to make an open offer. According to Moneylife, documents suggest that SEBI did not act on specific information on Vijay Mallya’s foreign transactions.  SEBI has been found to act selectively and in a biased manner even when documentary evidence is available; it simply refused to follow rules in the case of the complaint against its own chairman. How can the investor’s repose their faith in SEBI?

The second function of SEBI is the regulation of the marketing of schemes by the AMCs. Here it has loaded the industry with aberrations, one after another, and one worse than the other. Let me begin with the latest. The SEBI circular no.SEBI/HO/IMD/DF2/CIR/P/2016/42 dated March 18, 2016 mandates that the Account Statement issued to investors should include besides the name of scheme, number of units held and their market value, also the amount of commission paid by the MF to the distributors in rupees during the last half-year, including gifts, rewards, trips, event, sponsorships, etc.

The circular also mandates that the website of the MF should provide the names of fund managers, their monthly remuneration, designation and remuneration of chief executive officer, chief investment officer and chief operations officer, and also the tdesignation and remuneration of chief executive officer (CEO), chief investment officer (CIO) and chief operations officer (COO. The names, designation and remuneration received by all MF employees who earn Rs.60 lakh and above has also been disclosed. Surprisingly the circular does not mandate the MF website to disclose the remuneration earned by the chairman and the board members of SEBI, who regulate the MF schemes, and whose action or inaction has a direct impact on the interest of the MF investor.

Transparency is a worthy ideal; but it is governed by norms of privacy and dignity, lest it becomes obscene. More than that, transparency should serve a purpose. Car windows have a tinting norm – 70% transparency, according to the 2012 judgment of the Supreme Court.  But the Supreme Court has not applied the same norm to the glass used for the windows of residential houses; because it understands that transparency is not anuniversal good.

What purpose can the above disclosures serve? Can they help the MF investor to choose between different schemes or to choose between MFs and alternative investment options? If an investor finds that the distributor, through whom she has bought a SBI MF scheme and a HDFC MF scheme, earned more from the former than from the latter, can she claim the difference as damages from the distributor? Or, can she debar the distributor from selling her SBI MF schemes in future?

Or, can she terminate the services of the distributor for having sold her the SBI MF scheme? Or, can she conclude that the HDFC MF scheme is superior to the SBI MF scheme? I can think of nothing that the investor can do with that information, except hauling the distributor and blackmailing her to part with some part of her ‘extravagant’ income. Apparently, and with good reason, SEBI deems it right that, as the protector of the interest of the MF investor, it needs to enhance the investor’s earnings by letting her share in the income of the distributor, albeit in violation of its own regulations.

Instead of such draconian but stupid norms, SEBI could have served the interest of the investor better if it had focused on the investor rather than the distributor. It is a fact that many distributors are selling wrong schemes, with the sole purpose of earning higher remuneration. But disclosures of remuneration cannot solve that problem. Because then the remuneration of the distributor becomes the criterion for the choice of scheme – lower the remuneration, better the scheme; that is disastrous to the investor. Instead, SEBI should fix an absolute limit on the expense ratio of the AMC; let it then do what it wants with that margin, send its distributors to Pattaya or to Patagonia. If the distributor wishes to work for that remuneration, she works; or else she quits the trade. If the investor is willing to part with that expense charge, she invests in the MFs; or else she manages her assets herself.

It is high time this farce called Sebi Gondhall stops. And even more urgent is the need for the MF investor to put his mind where his money is, instead of leaving his baiko to the buva’s care!

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