Sinha slams MFs for flouting norms

Sebi chief says some fund houses violate investment restrictions and valuation norms

The Securities and Exchange Board of India (Sebi) chief has expressed his concerns over certain mutual fund industry practices, even as he lauded “out-sized” returns that the industry has managed to generate for investors.

Sebi Chairman U K Sinha said the industry needs to address distribution issues, and flagged violations of investment restrictions and valuation practices by some players. He spoke at the Confederation of Indian Industry (CII)'s Mutual Fund Summit in Mumbai.

Sinha noted violations of current rules, whereby investments in fixed deposit receipts should not exceed 91 days, and this, too, is only allowed if there is some short-term difficulty in making investments. He said asset management fees are also being charged for these fixed deposit allocations, whereas regulations say this should not be done.

“In some instances, we have also found that valuations and inter-scheme transfers are not exactly according to the Sebi requirements. I am mentioning all these because the whole industry is present here. I want you to note…that we are watching. We are aware of what is happening….I want to give you an opportunity…please try and make amends,” he added. Sinha said only a few fund houses indulged in these malpractices. He also talked about the issue of distributor commissions.

Sinha slammed the manner in which MFs conduct investor camps. According to him, six per cent of these meets were conducted for distributors rather than investors. Only 18 per cent were found to be having genuine investor meets. In 65 per cent of the cases, there was a lack of clarity on the schedule of these programmes.

He said distribution paradigms were changing, with Rs 133 crore of MF sales happening through mobile phones now. This is still a fraction of what happens in the banking industry, said Sinha, There is a need to use this medium more, he added. Sinha said the performance of the industry was encouraging, in terms of the returns generated for investors.

“Over a three-year period, 93 per cent of the (equity) assets have outperformed their benchmark. And over a five-year period, 91 per cent of the assets have outperformed their benchmark. If you look at the extent of outperformance, I am again very happy to note that more than 42 per cent of the equity assets have outperformed their benchmark by a margin of more than five per cent,” he said.

Interestingly, he hinted at more allocation to mutual funds from provident funds. The Employees’ Provident Fund Organisation (EPFO) is set to make its first equity investment soon with the aid of index funds. The Coal Mines Provident Fund has also given some responsibility to mutual funds to manage its assets. Others are also likely to follow suit, said Sinha.

“EPFO has shown its faith in you, and I’m sure that there are other provident fund agencies like the Coal Mines Provident Fund, or the Assam Tea Plantations or J&K Employee…they will also in due course; and I am aware that the government has already started thinking on those lines,” he said.

He also said a recent order on money laundering through the stock exchange platform is not the end of the matter.

"Sebi has a very effective surveillance system...this is an ongoing process," he said.