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Market regulator SEBI on Wednesday hauled up the independent trustees of mutual funds (MFs) for alleged violations by the fund houses, and asked them to ensure high corporate governance standards.
Independent trustees on the boards of asset management companies (AMCs) are like first-level regulators, and are privy to information pertaining to the conduct of business.
“Mutual Fund is a significant industry with the recent times witnessing record growth. Therefore, there is a need to have a good governance system in place. The role of Trustees being critical, it was considered important to reach out to the Independent Trustees of Mutual Funds, to interact with them, sensitize them on the significant role played by them and seek their feedback,” SEBI said in a statement on its website.
This comes after the regulator’s July 9 letter to the Association of Mutual Funds of India, asking it to ensure corrective measures against over 24 severe violations by domestic MFs found during inspections.
The regulator asked the trustees to act on these points in its meeting with them here on Wednesday, two sources privy to the discussion told BusinessLine .
SEBI is likely to hold regular meetings with them, the sources added. Today’s meeting was being held after around four years.
Wrongdoing aplenty
SEBI’s letter says it had carried out an inspection on large MFs between April 2014 and March 2016. It was found that MFs were not complying with guidelines on parking of funds in short-term deposits of scheduled commercial banks, not taking the approval of trustees before taking various decisions, not collecting proper KYC documents from investors, not fairly valuing unlisted shares as per policy and depriving investors of critical information.
Incorrect NAVs
Further, SEBI says, the MFs were denying investors the correct NAV as per the prescribed policy and investments were also not being made as per the objectives of the scheme. There were instances of close-ended schemes investing in assets that had maturity beyond that of the scheme, which resulted in a loss due to premature liquidation.
MFs have also failed in documenting the proper rationale for all investment transactions, including their inter-scheme transfers. There was concentration of risk due to non-adherence to sectoral limits for debt-oriented schemes, SEBI said.
‘Inappropriate’ expenses
On MF expenses, the regulator found ‘inappropriate’ expenses shown for investor education awareness and advertisement expenses not properly apportioned to all the schemes for which they were incurred. Other expenses were not charged at uniform rates. No filing of expenses was done with SEBI.
MFs were found borrowing for purposes other than those allowed under MF regulations and also transferring investments from one scheme to another due to errors in execution of trades. A periodical review of schemes’ performance was not done and MFs did not have proper systems in place to prevent debarred entities from transacting in MFs.
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