Risk Cover May Be Mandatory For Mutual Funds

Mutual funds (MFs) may be asked to mandatorily provide insurance cover against losses accruing to the asset management company (AMC) due to fraud by its fund managers, executives and other employees.

At present, this is voluntary and many funds have insured the company as well as some of its key executives in case of losses as well as criminal action against them.

According to mutual fund sources, the Securities and Exchange Board of India (Sebi) has been sending feelers to some funds as well as to the Association of Mutual Funds of India (Amfi) regarding this.

MFs, however, feel that there is very little scope for frauds considering the transparency in the sector.

Industry sources said the initiative by Sebi could have its origins in the recent problems at the Unit Trust of India where the decisions made by a few people in the organisation led to the trust suffering reverses. It also led to criminal action being initiated against the executives who were found to be responsible for the decisions.

In fact, Sebi had raised the issue of mandatory cover some time back for mutuals, but the idea was not pursued with seriousness. However recent moves by the regulator as well as the Amfi suggest that the idea is being revived and it could well become the norm.

The concern of Sebi is very clear - the interests of investors should not be jeopardised following losses to an AMC as a consequence of the actions of any of its employees.

Earlier this year, where a number of top executives of organisations being criminally prosecuted led to some of private banks scurrying to take executive liability cover. However in the banking sector, it is left to the individual banks to take the cover and there is no pressure from the Reserve Bank of India.