Sebi May Bar Mutual Fund Transactions With Affiliates
The Securities and Exchange Board of India (Sebi) is considering the tough option of banning affiliate transactions by mutual funds. This move is being contemplated by Sebi as one of the major steps to curb problems of the CRB type, where a large part of the funds were invested in the CRB group companies.
If implemented, the move would ban investment in mutual fund schemes by affiliates of the funds, as well as investment in affiliate firms by the funds. It would also cause a major shakeout in the mutual funds industry.
``It will initially upset the mutual funds industry, but would be good in the long run, Sebi officials said about the proposed reform, which seeks to bring the Indian mutual fund industry in line with the system in the US, where affiliate transactions by mutual funds are disallowed.
Top Sebi officials confirmed to Business Standard yesterday that the move is under active consideration and was discussed at length at a Sebi review meeting on Wednesday. Sebi would have to amend its mutual funds regulations to enforce the move, the officials pointed out.
``This is one of the major lessons from the CRB affair. The issue is whether investments by and into group companies should be allowed to continue. We will have to do something about it, a top Sebi official said. ``The issue of who can invest in a mutual fund also needs to be thrashed out.
Sebi would also have to define affiliate companies clearly for the purpose.
The review meetings have become necessary following a finance ministry directive to Sebi to review what the regulator has achieved so far, identify the key issues at present and list how it proposes to regulate the markets in future. The CRB affair has shown that C R Bhansalis mutual fund, Arihant Mangal, garnered over Rs 229 crore. Of this amount, only about Rs 6 crore came from the public. The balance amount was gathered from corporates, including affiliate companies.
The fund, in turn, invested an overwhelming part of its large corpus in the stocks of low-quality group and affiliate companies, most of which were unknown companies, causing a circular nature of group company investments.
Apart from Sebi regulations, the funds strategy was also questionable as it defeated the very purpose of setting up a mutual fund, which is primarily meant to be a vehicle for small investors. The CRB affair has also brought back into the spotlight the issue of who can invest in a mutual fund.
However, the proposed move has come in for some criticism. Says a senior finance professional: ``If this is implemented, Sebis collective wisdom would have wiped out much of the good work ushered in by the Mutual Funds 2000 report, which was set to revive the industry.
Sebi officials explained that corporates per se cannot be stopped from investing in mutual fund schemes, and there are even dedicated corporate mutual fund schemes abroad. But the issue of affiliates investing in such schemes would have to be put under the microscope.
Sebi officials pointed out that the issue of investments in affiliate companies was discussed at length when the Mutual Funds 2000 report which formed the basis of the new Sebi regulations on mutual funds was being finalised. However, it was felt that affiliate transactions could be allowed to continue in the interests of industry.
``In the US, mega manufacturing corporations generally do not have fund management companies. And fund managers are in that business alone. Therefore, the conflict does not arise. But in India, the situation is very different, the Sebi official said.
Earlier, back-to-back arrangements between mutual funds and corporates also flourished in India when there were initial target amounts specified for funds.
However, some key issues remain to be thrashed out. For instance, Unit Trust of India would be affected by the move, since it also invests heavily in public sector stocks. It would also have to be decided whether stocks of Industrial Development Bank of India, which has contributed to UTIs initial capital, can be picked up by UTI.