‘SEBI must act swiftly during crisis’

The market regulator should act swiftly in times of crisis and frame regulations that stand the test of time rather than make frequent changes, said M Damodaran, former Chairman, SEBI.

In a veiled reference to the Franklin Templeton fiasco, Damodaran said the regulator should have acted fast; it took the watchdog too long to act despite the criticism in the market. “Frankly, I was a little surprised that in a recent case it (took) this long. With all the criticism out there in the market, the regulator should have acted,” Damodaran said without naming any company. “I am sure they were doing something, but for the public to know that ‘yes, we are on top of this’ would have been very comforting,” he added.

The onus also lies with the trustees of the asset management company and they need to ask tough questions to safeguard investors’ interest, he said addressing a mutual funds summit organised by the CII on Friday.

‘Not a good job by MF trustees’

“I assume that trustees are asking tough questions but they are not focussing on the responses they get. They should understand that they are the torch-bearers of the mutual fund industry and they have definitely not done a good job. Every mistake caught by the regulator has missed the eyes of trustees,” he said.

When the industry makes a mistake and spots it, it should try to rectify it rather than inviting external regulation to set it right, said Damodaran.

Maximum enforcement

Both the mutual fund industry and SEBI should be in conversation in framing regulations. Once the regulations are framed, it should not be tweaked frequently, he added. The market regulator should write minimum regulations in discussion with the industry and ensure maximum enforcement. He said investment products have become complex and cautioned the industry that the increasing complexity will not do good to any one.

Given the sharp run up in the market, there is a lot of talk about passive funds being better than those managed actively. Activism is not bad, but when it becomes adventurism, it is definitely a cause of concern, he said.

Advising mutual funds to keep the communication to investors simple and frequent, Damodaran said funds should put themselves in the shoes of smallest investors.

If a small segment grows, it is not sustainable and it sets in tensions and frictions that can stress, and even break, the system. Thus, it is important to take everyone along the growth journey, he said.

Nilesh Shah, Managing Director, Kotak Mahindra Asset Management Company, said India’s AUM-to-GDP ratio at 12 per cent is near China’s 13%. However, compared to Western countries, the ratio is significantly lower, reflecting the level of penetration of mutual funds.