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S. Murlidharan

A bargain hunter wouldn’t do a second transaction at the same shop because conventional wisdom says the shopkeeper would get his back on the customer in the second outing. Many housewives are excellent shoppers and they keep this cardinal principle in mind while flitting from one vegetable vendor to another. The market regulator SEBI (Securities and Exchange Board of India) should be aware of this bazaar reality. It has a larger message for it.

Mutual funds invest in shares of companies normally keeping in mind the fundamentals though sometimes swayed by peer pressure engendering herd mentality and action. They are equally vulnerable to pressure tactics of corporates — we would patronise your income schemes if only you patronise our shares.

Shouldn’t this cosy relationship bordering on mutual back-scratching be stopped? It cannot be stopped by homilies or self-regulation. It can only be stopped by strict regulations.

SEBI’s mutual fund regulations should not allow a big ticket investor to invest in more than one scheme of a fund house because more than one simultaneous investment compromises at least one of them.

Mutual funds in India have hardly covered themselves with glory in the matter of playing a proactive role in company meetings, though for them voting with their feet is not the only option because unlike the FIIs they can vote with their hands as well. Mutual funds too have attracted the dubious insider tag being able to exit before it is too late, thanks to the cosy relationship they enjoy with the promoters of companies. In the event, they have voted with their feet with alacrity often but have largely been supine in the crucial decision-making processes.

They should demand and get berths on boards of companies where they have stakes. They should assert themselves on crucial issues.

L’affaire Satyam perhaps could have been avoided had the mutual funds played a proactive role in halting the marauding promoters on their tracks. Instead, it took the distant foreign investors who keep their ears to the ground to vote with their feet to stop the cynical misuse of company’s funds for self-aggrandisement.

Perhaps, the fear of pullout from the fund’s income schemes holds them back from asserting themselves, which is why SEBI should bar them from participating in both the schemes — Chinese walls have in the past proved to be pregnable after all.

The moot question of course is whether mutual funds are meant for corporates in the first place. Corporates have the wherewithal to make direct investments. It is the small investor who requires the crutches of a mutual fund. But then our income-tax law provides such a powerful gravitas for routing investments through mutual funds that no big-ticket investor, including companies, can be impervious to its blandishments.

While a company should not be allowed to invest in more than one extant scheme of a mutual fund house, for non-corporates there should be a specified threshold, say, more than Rs 10 lakh in two schemes.

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