SRO for mutual fund distributors runs into rough weather

Industry sources say it may take 2-3 months for the SRO to take final shape, while operations may take longer

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The much-awaited Self Regulatory Organisation (SRO) to oversee about 1 lakh distributors of India's Rs 9 lakh crore mutual fund industry has run into rough weather and may take a few months to become operational.

Sebi had invited applications in March 2013 for setting up the SRO and got responses from IMFI (Institution for Mutual Fund Intermediaries), FPSF (Financial Planning Supervisory Foundation) and OFD (Organisation of Financial Distributors).

IMFI was granted in-principle approval by Sebi, a decision that's been challenged by FPSF before the Securities Appellate Tribunal (SAT).

While Sebi is preparing its response to the SAT, the Finance Ministry has disclosed in reply to an RTI query that it had raised questions about the in-principle approval granted to IMFI, a subsidiary of AMFI (Association of Mutual Funds in India).

Sebi has explained its position to the Finance Ministry, but will have to wait for the SAT's final order before moving ahead with the SRO, a senior official said, declining to comment further as the matter is before the tribunal.

Industry sources said it may take 2-3 months for the SRO to take final shape, while operations may take longer.

AMFI acts as a front-line regulator for mutual funds and is responsible for registering distributors of fund houses.

The number of registered MF distributors is estimated at almost 1 lakh, although those with an active profile are fewer, and an SRO is expected to help and regulate this highly-dispersed segment of the capital markets.

Fund houses together command an asset base of almost Rs 9 lakh crore, which Sebi believes has the potential to grow to Rs 20 lakh crore in five years.

According to the FPSF appeal, IMFI was incorporated on August 2, 2013, and had applied for SRO permission on July 31, implying that Sebi granted in-principle approval to an entity that was not legal at the time of applying for the SRO permit.

The FPSF, promoted by the Financial Planning Standards Board India, also sought the finance ministry's intervention.

The ministry's response on the matter came to light in response to an RTI application filed by Shashank Prabhakar, who now represents FPSF before the SAT.

The finance ministry said in the RTI reply that "a plain reading of provisions of SRO regulations indicate that IMFI was not an eligible entity on relevant date, July 31, 2013.

"The subsequent notification dated November 18, 2013, even if applied retrospectively, doesn't empower the Sebi board to relax the condition of grant of licence under section 25 of the Companies Act," it added.

An AMFI official refused to comment on the matter, saying it has not yet received any communication from Sebi or the ministry.