The Securities Exchange Board of India’s mutual fund regulations have so far relied on a three-tier structure consisting of a sponsor, asset management company (AMC) and trustees, to enforce a governance structure that puts the interests of mutual fund investors first. But recent instances suggest that AMCs walk a thin line on their fiduciary obligations by subscribing to public issues of sponsor companies, taking concentrated exposures to their debt or allowing group entities access to information that enables front-running and insider trading.
SEBI’s latest consultation paper to review the role and obligations of trustees is an attempt to check such lapses, by clearly delineating the responsibilities of the trustees and the AMC board, so that the former can crack the whip wherever necessary. But whether this will be effective in checking mutual fund malpractices is moot, as trustees are figurehead bodies who have neither the access nor the expertise to conduct in-depth reviews of the workings of AMCs.
According to the regulations, trustees are required to exercise ‘regulatory oversight’ over AMCs to see that investors’ money is deployed in line with scheme objectives in the best interest of unitholders and ensure good governance practices. But there is usually a wide gap between principle and practice. Meetings of trustees tend to be few and far between. Their discussions are often based on information shared by the AMC. To arm trustees with more data to identify conflict-of-interest situations, the consultation paper suggests that AMCs, besides submitting routine reports certifying to regulatory compliances, must provide alert-based automated reports on pre-decided parameters. But as such reports too would originate from AMCs, their disclosures may remain selective, and their objectivity, questionable. As trustees operate at arm’s length from the AMC, it doesn’t seem practical to ask them to oversee aspects such as KYC compliance for mutual fund folios.
Trustees are often not domain experts on markets or fund management to allow them to identify bad investing decisions. Instead of increasing the supervisory responsibilities of trustees, SEBI needs to increase the accountability of AMCs, whose boards should be made responsible for all governance lapses. The constitution of a unitholder protection committee under the AMC Board to redress investor grievances and take care of investor awareness and education is a good idea. The consultation paper suggests that trustees can engage the services of professional audit firms, lawyers and so on, to evaluate MF operations, conflicts of interest, networth of the AMC and so on. Such independent evaluation can be made mandatory in all fund houses, with the results being submitted to the board of the AMC. The suggestion about setting up a common platform for dissemination of all information by mutual funds sounds like a good idea which will make it easier for investors to search for fund-related information.