Sebi chief warns MFs on debt paper

U K Sinha, chairman, Securities and Exchange Board of India has warned the mutual fund sector on the exposure of debt funds to papers of downgraded (by rating agencies) companies.

He noted that as of end-July, the sector carried Rs 4,000 crore of such companies' papers and this had more than tripled to Rs 13,000 crore by end-August.

Sinha spoke at the annual general meeting of the Association of Mutual Funds in India (Amfi), on Tuesday. In the speech, he said it was important for the sector to maintain and improve upon its reputation. There were, he said, serious issues with debt funds and fund houses needed to focus on the quality of paper being bought. Also, they should do own research, rather than take third-party views while buying debt papers of companies.

According to MF heads who were present, Sinha was especially critical about the lack of pace in the merger of schemes. Despite the clarification in this year's Union Budget, hardly any asset management company has tried to merge its schemes. In the Budget, the taxation obstacle for scheme mergers was removed. Sebi is also looking at the progress because there is no need for so many schemes, said Sinha.

The Sumit Bose committee’s recommendations were another thing Sinha focused on. He asked the sector to work at reducing costs, not wait for a formal order in this regard. According to sources, the mutual fund advisory committee at Sebi will meet on October 29 and the Bose report is to be extensively discussed.

The sector has started reducing costs. With effect from April 1, Amfi capped the upfront commissions that fund houses pay distributors, to one per cent in the first year.