After the investment shocks of last year that rattled some mutual fund buyers, capital market regulator SEBI has been working on strengthening the overall risk management system of the industry. According to sources, the regulator is keen on introducing stronger risk parameters to secure public investments further in the ₹15-lakh crore mutual fund industry.
An industry-wide survey commissioned by the Securities and Exchange Board of India and carried out by industry body AMFI assessing the current risk management systems of mutual funds has just been completed, according to senior fund executive familiar with the exercise. The Association of Mutual Funds in India has brought in KPMG as a consultant in this process, which probed the risk management systems that the 42 fund houses in the industry have in place to deal with enterprise risk, investment risks, operational risks and IT risks.
Amtek Auto episodeAfter auto component manufacturer Amtek Auto defaulted on corporate debt that it had issued last August, investors in two debt schemes of JP Morgan Asset Management India — which had invested in those instruments — were temporarily unable to withdraw part of their investments. As panic set in, debt fund investors in schemes of Franklin Templeton Asset Management pulled out money from their investments as well. While the latter has since been able to reassure investors and shore up its assets, JP Morgan AMC sold its domestic asset management business to its much smaller rival Edelweiss Asset Management.
Since then, SEBI has brought credit rating agencies under its scanner, reviewing their response mechanism to defaults on instruments they have rated and the warning systems they have in place for investors of such instruments. SEBI also introduced “gating” norms, rules regulating how a mutual fund will respond in case of a default on an investment it has made and restricting its ability to cap withdrawals by retail investors, like JP Morgan did.
CVR Rajendran, CEO, AMFI, said the exercise will results in new rules upgrading the risk management systems already required of the fund industry. “It will focus mostly on credit risk, the exposure that an AMC can take to a certain corporate, the group-level exposure limits that fund houses cannot solely rely on external credit rating agencies.”
“The new rules will also focus on the kind of people that a risk management team must have,” Rajendran added. The report will be submitted to SEBI in the next few days, based on which an updated circular on risk management is likely.
“India is a maturing risk market,” a senior fund executive told BusinessLine . “During the survey, MNC mutual funds and well-established fund houses which have embedded reporting and risk management processes performed better, while smaller fund houses may not have this matrix in place yet. Ultimately, it’s public money that is at stake.”