The Hindu Business Line : SEBI for depository model for MFs

THE Securities and Exchange Board of India's SMILE task force has recommended that mutual funds should move to a depository model in order to expand the reach of fund houses.

Depository participants (DP) are electronically linked to one or both of the two depositories, and in the proposed model, each registrar would also be similarly connected electronically to the two depositories. If a large number of mutual funds adopt the depository model, investors can use the DP as a single point for transacting across a range of mutual funds. The depository model can provide both enhanced reach and enhanced choice, the report says.

The securities market infrastructure leveraging expert (SMILE) task force identified the transaction cost of setting up collection centres in small towns, the delays in fund clearance and the slowness of inter-city payment systems as the main constraints of expanding the reach of mutual funds.

The committee also suggests utilising the distributor network for the same.

Expanding the reach of the industry within the existing model will require the industry to invest in collection centres in smaller towns, which, at existing levels of business, may not prove remunerative, and such investments can only be expected to occur gradually.

Scalability in transaction volumes also puts pressure on the functioning of centralised applications processing systems of the kind that registrars currently operate, raising fears of an increase in operational risk, observes the report.

The DP-registrar model will provide for more distributed transactions processing, says the report.

DPs offering mutual fund services must be adequately trained for this purpose, as data entry for mutual fund schemes is more elaborate than for the equities market. Also, DPs will need to indemnify investors against losses arising out of errors in data capture.

The adoption of the depository model could introduce certain conflicts of interest between distributors and DPs. Distributors might be apprehensive about approaching DPs who are also into distribution (whether bank DPs or broker DPs) on the suspicion that existing distribution relationships might be poached upon. In order to avoid this, the report recommends that existing collection centres and registrar and mutual fund offices be converted into limited purpose DPs.

It will always be possible for distributors to approach these limited purpose DPs, and existing arrangements will remain undisturbed, recommends the report.

The report is now placed for public comments on SEBI's website, www.sebi.gov.in.

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