SEBI wants MF trustees to crack the whip on poor performance

Speaking to Moneylife in an exclusive interview, KN Vaidyanathan, executive director, SEBI, said the regulator is working out the modalities for making trustees of mutual funds more accountable for fund performance. This is the second part of a series 

The indifferent performance and herd mentality of the Indian mutual fund (MF) industry is primarily due to the lack of accountability of asset management companies (AMCs), whose earnings are directly related to the corpus they manage and totally unrelated to fund performance. But how does one make the AMCs accountable? In an exclusive interview with Moneylife, SEBI executive director KN Vaidyanathan said the regulator is working out the modalities for making trustees of mutual funds more accountable for fund performance.

“The entire centerpiece of the mutual fund model in India is the mutual fund trust. The money is given to the trustees in trust to manage. But trustees have to get more active about performance record,” Mr Vaidyanathan said.

Under the current SEBI norms governing mutual funds, the board of trustees of a fund is entrusted with the task of monitoring fund performance and helping redress investor grievances in close collaboration with the regulator. Two-thirds of the directors of an MF’s board of trustees must be ‘independent’, that is, they should not be associated with the sponsors of the fund; also, 50% of the directors of the AMC must be independent. The names of the AMC’s directors and trustees must be mentioned in the fund’s offer document. Significantly, the existing norms even empower the board of trustees to sack the AMC’s board of directors for not safeguarding investor interests or for non-adherence to SEBI norms. But all of this power has remained only on paper and there is no precedent of the trustees of a fund sacking the AMC’s board for non-performance.

Mr Vaidyanathan said the new guidelines would require AMCs to disclose all information related to portfolio churn and risk-adjusted measures so that trustees can act on the basis of this information.

Under the existing mechanism, the auditors of a fund send their inspection reports of the fund’s performance to SEBI which, in turn, forwards them to the AMC. The AMC’s views and comments are sent back to SEBI and they are then passed on to the fund’s trustees so that they can evaluate the fund’s performance and suggest corrective measures. “This made no sense. We have changed the process,” Mr Vaidyanathan said. “We said that the comments would all go to the trustees and they will have to respond directly to us. We have met the trustees of least 15-20 funds and have asked them: what do you do on performance? When an AMC says that we have these five top-performing funds, do you ask them what about the 10 others that are not performing? In fact, we are also telling everybody to raise the bar on analytics of fund performance.”

Admitting that sponsors who have no performance track record in the financial services business have gotten into the mutual funds business, Mr Vaidyanathan said the regulator has tightened the entry norms for fund sponsors. “Sponsors used to have a clever way around. They used to hold a 39% stake, probably with side agreements with other investors. We have tightened it. We have said that anybody with 10% shareholding, and/or a director and/or a brand name will be treated as sponsors. At least three fund companies have had to change their plans because of this. We are insisting on customer track record of financial services,” he said. He clarified that the new norms would apply only to new entrants.

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COMMENTS

Satish Amin

7 years ago

I am glad you have taken up this matter on a serious note. You are absolutely right by saying there is no accountability in the whole system. Few years back I had written to an AMC asking them how there particular fund is not doing well. I even gave them the comparision of another fund house which opened thier NFO at the same time and that was doing much better then this. I had sent few reminders too, but no body replied.
Frankly, SEBI should put a ceiling on the remenuration/perks these fund manager get. I am sure you are fully aware about all this. Such huge annual package coupled with such big incentives. I have recently come to know that there are Fund Managers who makes minimum 2/3 trips in a year and that too with his fly/spouses outside India. I was also told that they are given the best of cars. I just fail to understand how these business houses, in short a service industry which works of commission can afford to do this. Even large production companies do no enjoy like these AMC people. In short these guys play with our money and in their case both heads and even tails are winners because as you rightly said there is 'NO ACCOUNTABILITY'. I wish you also take up this case about their salary package/incentitives.
Thank you once again for doing such a wonderful job to save guard customers and also keeping us abreast about all the developments in the Industry.

Knowledgeble Investor

7 years ago

If SEBI educate the investing community to pay the proper advisory fee to the Advisor will he the guts to sell the non sense to you?

Will SEBI wake up and educate the Investors first?

Vijay Trimbak Gokhale

7 years ago

Trustees and AMCs of MFs are established as per SEBI MF regulations and trustees appoint AMCs as investment manager also as per the sam regulations. Trustees oversee/supervise the functioning of AMCs on the basis of reports submitted by AMCs only. The question is not only of making Trustees work but make suitable regulations so that trustees have independent staff and office. This will enable them to discharge their function independently. Trustees attend only board meetings which is attended and navigated by AMC CEO almost as a matter of rule. This coupled withe fact that reports to trustees are prepared by compliance managers of AMC reporting to CEO of AMC compromises greatly with the quality of supervision and surely raises serious questions conflict of interest between AMC and Trustee companies. My detailed presentation on this issuse made a couple of years ago has not received due attention from SEBI. Hope SEBI will someday realise the importance of import of my presentation. That will agur well for the investors. A common citizen cannot do anything beyond bringing it to the attention of the regulator. You can take the horse to the water but you can not make it drink.

Hemant Beniwal

7 years ago

Why after ban on Entry Load in Mutual Fund, many agents started selling Structured Products, PMS from Mutual Fund Companies or Highest NAV Gurantee Plans from Insurance Companies? No prize for answer.

How Mutual Funds Work
http://www.tflindia.in/2010/05/how-mutual-funds-work.html

Retirement Planning

Stock exchanges are chasing retired bureaucrats with offers of directorships

The babus have never had it so good. A few years ago, every secretary of the government of India used his/her pre-retirement years to lobby for a post-retirement sinecure. Regulatory bodies have been their favourite destinations, because they ensure a continuation of power and clout over all the people that matter. Now, their working life is extending beyond that phase as well. Senior bureaucrats are discovering that their sarkari jobs have become an important asset in landing lucrative directorships. That is because professionally run bodies, such as stock exchanges, are chasing them with offers of directorships. Bourses like the Bombay Stock Exchange (BSE), the Multi-Commodity Exchange and the newer exchanges set up as open public-private partnerships are working hard to position themselves as quasi-government organisations. Why is this so important? Mainly because the finance ministry and the capital market regulator accord special treatment to the National Stock Exchange (NSE), which positions itself as a sort of sarkari exchange. Finance ministry officials spend time at the NSE on deputation postings which are a stepping stone to jobs with the capital market regulator. Often, the NSE is the only exchange that is invited to be part of international delegations with the finance ministry and SEBI (Securities and Exchange Board of India). This enhances the NSE’s clout. Also, given that it was originally promoted by a set of public-sector entities, it has been headed by chairmen of the Life Insurance Corporation or IDBI. The NSE no longer has such a significant public-sector shareholding, but the recent appointment of Dr Vijay Kelkar (former finance secretary and chairman of the 13th Finance Commission) as its non-executive chairman helps retain the image of a quasi-government entity.

In fact, NSE is a hugely profitable (operating margin of over 50%) but secretive organisation that pays the highest salaries in corporate India to its top management which, in turn, works hard to avoid disclosures under the Right to Information Act.
Naturally, every other exchange strives for a similar status. So, MCX is headed by a former finance secretary, Ashok Jha, and has several former bureaucrats and regulators on its board. The BSE, which used to be happy with private-sector heavyweights, is also roping in top babus. It recently added two ex-IAS officers as public directors on its board and already has another, Vivek Kulkarni, as the shareholders’ director. The newest entrant, United Stock Exchange, has also announced the appointment of Arun Ramanathan (former finance secretary) and Dipak Chatterjee (former commerce secretary) as independent directors. Clearly, the benefits of being part of the civil service are lifelong.

Judiciary Dislikes It
This happy scenario of IAS officers planting themselves into every conceivable aspect of public and private administration is only likely to face a block when it comes to exercising quasi-judicial functions. In a landmark judgement in May 2010, a five-judge constitutional bench of the Supreme Court of India said that the government would have to amend the laws before instituting the National Company Law Tribunal and the Appellate Tribunal. Equally importantly, the Bench (comprising Chief Justice KG Balakrishnan and Justices RV Raveendran, DK Jain, P Sathasivam and JM Panchal) also slammed the practice of filling such tribunals with bureaucrats. Justice Raveendran, who wrote the judgment for the Bench, said that bureaucrats could, at best, be technical members of tribunals and all appointments to the post of presiding officers had to be made in consultation with a committee headed by the Chief Justice of India or his nominee and comprising a judge of the Supreme Court or the High Court, as well as secretaries in the ministries of company affairs and law & justice. The Supreme Court also said that the technical members should not exceed judicial members and the tenure of the members should be increased from three years to five or seven years. The judgement says that “a term of three years with a retirement age of 65 is perceived as tailor-made for persons who have retired or shortly to retire and encourages these tribunals to be treated as post-retirement havens.” Elsewhere, the learned judges expressed worry at the shrinking of space occupied by the judiciary and the dilution of qualifications required to discharge judicial functions. The judgement says, “The speed with which the qualification for appointment as Members (of these tribunals) is being diluted is, to say the least, a matter of great concern for the independence of the judiciary.” This is just the beginning. We learn that the judiciary is extremely concerned about persons with no legal background taking on quasi-judicial functions, not only on tribunals, but even on independent regulatory bodies. One example was the manner in which the SEBI board, in a meeting chaired by Mohandas Pai (a director of Infosys), reversed an order of the Mohan Gopal-V Leeladhar Bench with regard to the National Securities Depository Limited (NSDL). Concerned members of the judiciary worry that, unless checked, this trend will vitiate the justice delivery mechanism.{break}

Selective Recall
Even regular market-watchers were rather startled with the SEBI press release announcing that Motilal Oswal Securities had filed consent terms in what was dubbed the IPO (initial public offering) or multiple application scam of 2003-05. The firm settled the case on 6th May by paying Rs5 lakh without acknowledging guilt. Earlier, SEBI officials had wanted its operations as a depository participant to be suspended for six months for failure to exercise due diligence in enforcing KYC (know your customer) norms.

The Motilal Oswal case is rather curious, because SEBI was quick to permit it to set up a mutual fund, where it would handle the savings of several thousand retail investors, even when this case was pending.  Of course, in September 2009, Motilal Oswal Asset Management had smartly appointed Dr PJ Nayak, whose reputation for personal integrity and as a banker is sky high, as its chairman in the run-up to getting SEBI clearance in January this year. We learn that Dr Nayak has since resigned, after taking over executive responsibility as country-head and CEO of Morgan Stanley in India in March 2010. Motilal Oswal’s first offering, an exchange-traded fund based on a proprietary index, is still to be launched.

Radia’s Haldia Deal
The Income-Tax Department keeps the transcripts of the Niira Radia tapes a closely guarded secret. They are marked ‘Top Secret’ and ‘Strictly Confidential’, obviously because the PR firm, which has the accounts of Reliance Industries Limited as well as the Tata group, is bound to have enormous clout. Yet, the inevitable driblets are slowing seeping into the public domain, to reveal the exact nature of ‘communication’ and ‘PR’ skills that Ms Radia brought to these companies. A part of these transcripts available with us indicates that Mukesh Ambani apparently wants to take over Haldia Petrochem with Ms Radia helping the deal, but “one Purnendu may create a problem and will have to be handled by Mukesh.” The authenticity of the transcripts is clear from the fact that the person on the job doesn’t even know that the ‘one Purnendu’ is none other than Dr Purnendu Chatterjee, deputy chairman of Haldia Petrochemicals. Ms Radia, meanwhile, seems to be working with the Haldia chairman to re-open the issue with CPM leaders Nirupam Sen and Prakash Karat.

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COMMENTS

SAMAR MAHAPATRA

7 years ago

Excellent exposee.In the true tradition of Sucheta Dalal.

Drunk Policymaking

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