MFs to use AUMs to fund new regulator

Mutual funds will use part of their assets under management (AUMs) to finance the operating costs of a Sebi-proposed self-regulatory organisation (SRO) to regulate their agents and distributors.

According to the suggestions made by its mutual fund advisory committee (MFAC), the Securities and Exchange Board of India (Sebi) has agreed to set up an SRO to regulate the MF distribution business.

While the seed capital for setting up the proposed SRO would be provided by Sebi and the mutual fund industry body Amfi (Association of Mutual Funds in India) and some entities have also shown interest in sponsoring such an SRO, a senior regulatory official said.

Sebi would follow a transparent process for selection of the sponsor for the SRO, he said.

Besides, Sebi is of the view that the recurring cost for the operations of SRO may be borne out of contributions from asset management companies (AMCs) in the form of two-three basis points (0.02-0.03 per cent) of the AUM.

The average AUM of all the fund houses put together rose for the first time in four quarters in the three-month period ended June 30. It stood at Rs 6.92 lakh crore, up from Rs 6.65 lakh crore in the previous quarter.

The proposed SRO could be a registered company under the Section 25 of the Companies Act, wherein all profits are ploughed back into its operations, and will regulate distributors of securities like mutual fund, portfolio management and related products.

The decisions follow deliberations by MFAC about mutual fund distributors in India not being regulated and there having various complaints against them for mis-selling of products to the investors. As per the current regulations, the distributors need to register with Amfi and their registration can be cancelled by Amfi for violation of a prescribed code of conduct or for any other malafide practice.

To have a greater vigil on distributors, MFAC felt that there was a need for having a SRO for distributors and made the suggestion to this effect to the market regulator Sebi. While Sebi board has already approved the proposal, a notification to this effect is expected shortly.