Sebi shakes up mutual fund sector

Revamps governance norms for listed entities with a series of new rules, raises funds' operating costs

The Securities and Exchange Board of India (Sebi) on Thursday cleared a slew of measures affecting corporate governance in listed entities and the functioning of mutual funds (MFs).

These aim to make independent directors (IDs) on company boards more accountable and give a bigger say to public shareholders in these entities. The capital markets watchdog also cleared a long-term policy on MFs requiring these to maintain a higher capital base and invest a minimum sum in their own schemes, making it more expensive for them to operate.

Sebi introduced a number of curbs on IDs, considered torch-bearers for minority investors, and brought new restrictions to related-party transfers.

The regulator, in a statement issued after a meeting of its board of directors, said an ID could be on the board of a maximum of seven companies; it could be no more than three if the person is a wholetime director. The move is in line with the new Companies Act.

“This cap  is an important way of making sure they are able to perform their duties adequately, especially if the role or responsibility is large. Also, the exclusion with regard to nominee directors is important. They are typically put in place by entities investing in these companies and cannot be considered independent,” said Prithvi Haldea, managing director (MD), Prime Database (an agency focusing on the primary capital market).

Sebi also mandated all companies to have at least one woman as a director on the board and restricted the total tenure of IDs to two terms of five years each.

The regulator also mandated companies to make more disclosures on their renumeration policies and to disclose the performance evaluation of their board, a move likely to put more of a spotlight on the pay and performance of senior officials at listed companies.

“There are companies in which promoters are paid salaries far higher that what is paid to top management in peer companies. The voluntary corporate governance code had earlier suggested a committee can decide on remuneration; now, this has been made mandatory. Out-sized compensation packages will likely be curbed as a result, as these committees are to be chaired by IDs,” said J N Gupta, MD at Stakeholders Empowerment Services, a corporate governance and advisory firm.

Sebi also told companies to put in place an “orderly succession plan”for senior management, to ensure they didn’t suffer from a sudden and unplanned gap in the leadership.

The regulator also mandated prior approvals of the audit committee, and restricted promoters from voting, on related-party transactions (RPT). The move is aimed at curbing the menace of “abusive RPTs”, which put minority shareholders in a disadvantageous situation.

An RPT, simply put, is any deal involving entities connected to the promoter. A recent instance of an RPT would be the Maruti Suzuki's proposal to transfer its proposed Gujarat plant to a company wholly-owned by its parent, Suzuki. Sebi also asked listed entities to formulate a whistle-blower mechanism, to help employees report to the management instances of unethical behaviour, suspected fraud or violation of the company’s code of conduct. “The corporate governance norms are in keeping with current thinking. They empower investors and bring clarity to company boards as regards their roles and responsibilities,” said Amit Tandon, MD, IiAS.  

The new corporate governance norms, which take effect from October 1, will apply to all listed companies.

To ensure only serious asset management companies (AMCs) stay in business, Sebi increased the minimum net worth from Rs 10 crore to Rs 50 crore  and also asked all entities to invest at least one per cent, or a maximum of Rs 50 lakh, as “seed capital” in all their open-ended schemes. Seed capital will ensure the 44 players in the sector have a stake in the performance of their schemes.

Nilesh Sathe, chief executive officer, LIC Nomura MF, said higher net worth will help ensure serious and stable players enter the business. “Having fund houses invest in their own scheme could help in creating a track record for the fund. It will also help investors take a safe and informed decision while investing,” he added.

 

Many mutual funds have been against increasing the minimum networth requirement for the industry, which is already reeling under the impact of weak markets and investor apathy

 

“The long term policy includes all aspects - including enhancing the reach and promoting financial inclusion, tax treatment, obligation of various stakeholders to deal with the public policy objectives of achieving sustainable growth of the mutual fund industry and mobilisation of household savings for the growth of the economy,” Sebi said in a release.

 

Sebi also allowed employee provident fund organisations (EPFOs) to invest up to 15% of their corpus in equities and mutual funds. 

 

The market regulator also made strong tax-related proposals, including doubling of investment limits under 80C of the Income Tax Act to Rs 2 lakh to specially include mutual fund-related investments. 

 

Sebi also proposed Mutual Fund Linked Retirement Plan (MFLRP), which will be a long term investment product with additional tax incentive of Rs 50,000 under 80C of Income Tax Act.

 

The regulator will be implement the proposed non-tax related changes for the mutual fund industry, however, it will have to wait for the new government to clear the tax-related proposals. 

TIGHTENING THE GRIP
Sebi revamps corporate governance norms, prods MFs, eases KYC

Corporate governance:

• Compulsory whistle-blower policies
• Shareholders will have to approve related party transactions
• Cap on independent directors, can serve on the boards of up to seven companies
• Whole-time directors can serve on boards of up to three companies
• No stock options for independent directors
• Tenure restricted to two terms of five years
• Committee headed by an independent chairman to decide on pay packages

Mutual funds

• Mutual fund net worth requirement raised to Rs 50 crore
• Fund houses will have to put in up to Rs 50 lakh of own money in the open-ended schemes it offers to investors
• Recommends PSUs be allowed to invest in non-PSU MFs

Know-your-customer norms (KYC)

• Currently, intermediaries can access centralised database or do a fresh KYC for a client who is already KYC compliant
• Sebi has now said there will be no fresh KYC for those who are already in compliance