Sebi wants more checks on MF expenses

The Securities and Exchange Board of India (Sebi) is preparing ground for a fresh set of mutual fund (MF) reforms to make the instrument more transparent and attractive for investors.

The MF advisory committee, comprising industry and Sebi representatives, is due to meet on Monday to discuss the proposals.

For a start, the regulator wants fund houses to keep promotional expenses, such as those on foreign trips and gifts to distributors, outside the ambit of the expense ratio. This ratio — it includes fees paid to fund managers, advertising, legal, record-keeping and accounting costs, custodial charges and taxes — is capped at six per cent for a scheme. In most cases, fund houses keep the expense ratio around 2.5 per cent, but include promotional costs in the calculation.

Sources familiar with the development said the regulator suspected that many costs passed off as advertising or promotional expenses were in reality paid to distributors for pushing sales.

The move comes when Sebi has been embroiled in a battle with the insurance regulator, Irda, for control over unit-linked insurance plans, seen as a rival to MF schemes. By reforming the commission structure for these schemes, the market regulator has put pressure on the insurance sector to opt for reforms.

Clearer performance measures
In addition, at the Monday meeting, the regulator would want to put in place a more investor-friendly performance review mechanism. At present, apart from the daily net asset value, fund houses put out monthly fact-sheets which provide mathematical calculations comparing and evaluating the schemes on offer. The regulator feels retail investors find this form of review complicated. Instead, it wants MFs to provide specific quantitative parameters for one to be able to judge the performance of a scheme.

The advisory committee is also to discuss issues like guidelines for MF investments in equity derivatives. This has become a contentious issue. Some members feel fund houses should not be allowed to invest in risky instruments like stock derivatives.

However, if a complete ban was not possible, there should be some specific guidelines, said an industry source.

The committee, whose earlier meeting was in November, was also likely to look at the issue of conflict of interest among trustees, asset management companys (AMCs) and managements of fund houses, sources said. The issue was discussed earlier and it was noted that there was an overlap in membership of these entities.

Sebi had addressed the issue by ordering that AMCs, trustees and managements should have different sets of individuals. The sources said the regulator wanted to ensure that no gaps remained in the regulations.

In the recent past, Sebi has used the MF advisory panel to usher in a lot of changes, such as in the entry and exit load structure, put in place last August.