Scaling Paper Mountains

Each year, chartered accountants carefully selected by Sebi will fan out to the offices of the mutual funds, open the safes, and scrutinise the lists of shareholdings. They will then qualify their reports where directors have failed to write down the dates of acquisition. The secretaries of the asset management companies will write to the directors asking them to furnish the dates of acquisition.

Heaven help the director who gets the dates wrong. For the chartered accountants will be watching with an eagle eye for discrepancies between successive years' statements. If the date of acquisition of this listed asset is July 16, 1983, why did it not figure in last year's statement? How could those shares have been acquired on April 30, 1994? Ponderous reports will be sent to Sebi about misrepresentations by directors. Out of the 500 directors, a good number will be disqualified by Sebi within a few years. As it is, mutual funds find it difficult to get competent directors, especially for their asset management companies, for a sitting fee of Rs 2,000; public sector mutual funds in particular fill up their boards with retired bureaucrats and friends. Once the auditors start playing ducks and drakes, the shortage will be even worse; unemployed lawyers will be recruited by the dozen to fill the gap.

 

All this in a system which does not even take the elementary step of defining sensitive periods before the accounts are presented, or bonus issues decided on, and prohibiting directors from trading in these sensitive periods. Transparency and ensuring that there is no conflict of interest are worthwhile objectives, but they must be sensibly pursued.

The serious point is that mutual funds charge investors anything up to 3 per cent a year for doing something that the investors are perfectly capable of doing themselves. To justify their asset management fees, they must add value. Some value is added simply by diversification and risk reduction; but that is never enough. Mutual funds must be more alert, knowledgeable and clever than common investors if they are to survive. These are the qualities that matter in directors; and they do not come cheap. The ideal directors are those who have managed their own funds with conspicuous success. They are not ones who will be attracted by a ridiculous sitting fee or the privilege of furnishing voluminous information about their holdings. It is time Sebi recognised the scarcity value of good directorial talent.