Tribunal asks Sebi to select SRO afresh for MF distributors

Securities Appellate Tribunal (SAT) today asked Sebi to select an applicant afresh for setting up a Self-Regulatory Organisation (SRO) for mutual fund distributors, as it set aside the markets regulator's earlier in-principle approval to IMFI for this role.
The Tribunal, however, said that IMFI was eligible to apply and Sebi was justified in entertaining its application.
Sebi had granted the in-principle approval last year to IMFI (Institution for Mutual Fund Intermediaries), which was challenged before the Tribunal by another applicant Financial Planning Supervisory Foundation (FPSF).
The appellant had submitted before SAT that IMFI was not eligible to apply and therefore Sebi was not justified in entertaining its application. FPSF had also contended that Sebi was in violation of the relevant regulation by not giving an opportunity of hearing before rejecting its application.

In a 43-page order passed today, the SAT said that the regulation requires Sebi to give opportunity of hearing to the unsuccessful applicant at the time of selecting and granting in-principle approval to an applicant.
"Since Sebi has failed to comply with the requirements of regulation..., we quash and set aside the impugned decision of Sebi dated February 6, 2014 and direct Sebi to select an applicant afresh for grant of certificate of recognition in respect of distributors of mutual fund products," SAT said.

Sebi had argued, among other things, that as per norms, it was required to offer hearing to the unsuccessful applicants only at the time of granting final certificate of recognition, and not before grant of in-principle approval.

SAT, however, said this argument of Sebi was "without any merit" and "it would be just and proper to hold that opportunity of hearing has to be given to the unsuccessful applicants at the time of selecting and granting in-principle approval to the successful applicant".
FPSF, promoted by Financial Planning Standards Board India, was one of the applicants for setting up the SRO for mutual fund distributors.
IMFI is promoted by mutual fund industry body AMFI (Association of Mutual Funds in India), a grouping of all fund houses in the country that is also currently entrusted with the responsibility of distributor registrations.

The decision to set up an SRO followed concerns that MF distributors were not being regulated and there were rising complaints against them for mis-selling of products.
Besides IMFI and FPSF, the third applicant for this SRO role was Organisation of Financial Distributors, which was set up by Financial Intermediaries Association of India (FIAI), a grouping of 15 large distributors.
FPSF had also contended that Sebi was biased in favour of IMFI "even before inviting applications for being recognized as SRO and hence the impugned decision of Sebi is liable to be quashed and set aside".
"In these circumstances, without going into the merits of the third contention raised by the appellant (FPSF) that Sebi was biased in favour of IMFI, we hold that Sebi is not justified in granting in-principle approval to IMFI before granting opportunity of hearing to the appellant...

"Accordingly, we set aside the impugned decision of Sebi, and direct Sebi not to take any further steps in the matter till the mandate of regulation is complied with.
"Sebi is further directed to select an applicant for grant of certificate of recognition in accordance with law after taking into consideration all relevant facts of each applicant without being influenced by any particular factor related to any particular applicant," the Tribunal said.