Sebi flags 23 MF practices, warns of action if they violate rules again

Regulator tells fund houses any repetition of breaches will be viewed seriously

The Securities and Exchange Board of India (Sebi) sent a letter to the mutual fund (MF) industry body — Association of Mutual Funds in India (Amfi) — raising concerns with 23 irregularities that its inspection team found short of the best-industry practices or in breach of the existing regulatory framework.

“Sebi, after considering the observations of the inspection team for the period April 1, 2016, to March 31, 2017, and the comments of asset management companies (AMCs) and trustees thereon, has taken adverse view of the following additional observations with respect to the practices for MFs,” the regulator’s letter read.

Further, the regulator directed MFs to take corrective action in respect of the adverse observations mentioned in its letter. “Any repetition of the violations or non-compliance … would be viewed seriously,” Sebi’s letter said.

Some of the practices pointed out by the regulator showed instances where investors’ interests were getting compromised.

The market regulator pointed out instances of misleading the investors by reporting incorrect data on investor complaints, instances of inappropriate utilisation of funds meant for investor education, such as spending on programmes meant for financial advisors, charging of expenses to the said funds for stationery items such as notebooks, planners and calendars, and charging of expenses without adequate records.

“To be sure, the inspection is for 2016-2017, but MFs must make sure investors’ interests are protected and they are not misled in any way. Keeping investors’ interest central to all transactions is important as they are critical to the growth of the industry,” said an MF advisor.

In another observation, the regulator pointed out failures to liquidate equity portfolio of close-ended schemes on or before the maturity date. Sebi also pointed out lapses to ensure direct plans have a lower expense ratio than regular ones, so that the difference is as much as the distribution commission expenses.  

Inter-scheme transfers of debt securities continued to be a concern. According to Sebi, there have been instances of non-disclosure of transactions of debt and money market securities (including inter-scheme transfers).

“Inter-scheme transfers have always been under Sebi lens. That is also the reason why regulator clamp-down of the practice where MFs used valuations from inter-scheme transfers to value the debt securities on their schemes,” said senior executive of a fund house.

Some of the other observations raised concerns over MFs’ dealings with distributors. The regulator said there were instances wherein the AMC continued to accept business from distributors, who were suspended by Amfi. Further, AMCs also failed to ensure no commission is paid to the distributors when they are suspended.

Sebi also highlighted failures to identify and appropriate all the expenses in the individual scheme, according to the regulatory requirements.