On February 09, 2023, the Securities Exchange Board of India (SEBI) has issued a consultation paper to review the role and accountability of mutual fund trustees in order to protect the interests of unitholders. Furthermore, the regulator has made certain recommendations to enhance the accountability of the board of Asset Management Companies (AMC).

The purpose of the consultation paper is to solicit feedback on problems concerning trustees’ roles and responsibilities, as well as to bring clarification to AMC’s boards of trustees.

What is the role of Mutual Fund Trustees?

Mutual funds in India are organised into three levels: The mutual fund, the trustees, and the AMC. The trustee performs an important role in the mutual fund. A mutual fund house’s trustee monitors the AMC’s activities on a regular basis to ensure there are no violations. They are also obliged to supervise AMC and its actions in order to guarantee that AMC operates in the best interests of the unitholders.

For example, trustees are required to review transactions made in their own names and on behalf of the AMC by senior management staff and to report any malfeasance to SEBI. Trustees can also prevent AMCs from launching new schemes if any irregularities are discovered. Trustees should make sure to track investor complaints and address them.

What has SEBI proposed to enhance the role and obligations of Mutual Fund Trustees?

Over the last decade, the mutual fund industry’s AUM has grown fivefold, from Rs 7.93 lacs crore on November 30, 2012, to Rs 30 lakh crore in November 2020 and to Rs 39.89 lakh crore as of December 31, 2022. In order to protect the interests of mutual fund unitholders, the market regulator, SEBI, has recommended to strengthen the role and accountability of trustees.

SEBI has proposed that trustees be held accountable for implementing system-level checks to avoid fraudulent transactions.

Here’s a list of things that SEBI has proposed in the consultation paper:

  • In order to establish an impartial review mechanism for AMC decisions from the perspective of unitholders’ interests across all products and services, SEBI has proposed mandating the formation of a ‘Unit Holder Protection Committee’ (UHPC) by the AMC board
  • A common platform for the dissemination of public announcements by mutual funds
  • The chairperson of the trustee company should be an independent director
  • Trustees of mutual funds should focus on market abuse by AMC, its employees and mis-selling by AMC to increase the asset base
  • Trustees should be responsible for the fairness of fees and expenses charged by the AMC, compare its performance with peers, and ensure that the AMC’s sponsor is not receiving an undue advantage
  • The trustees should be responsible for periodically reviewing the steps taken by AMCs for the folios which do not contain all KYC attributes with bank details
  • Trustees and their resource persons should independently evaluate the extent of compliance by AMC and not merely rely on AMC’s assurances. To facilitate the trustee’s supervision, AMCs should provide them with the required analytical information.

Apart from that, the SEBI has enumerated specific responsibilities that trustees might transfer to AMCs. This includes ensuring that all processes are in place prior to the AMC’s launch of any plan, as well as computing any income owed to the fund and any income received by unitholders in the mutual fund. From a governance standpoint, the regulator has proposed to provide a one-year time to existing trustees with the board of trustee structure to convert into a trustee company.

Having said that, to ensure that trustees are able to focus on their core responsibilities, SEBI has proposed that the trustees may rely on professional firms like audit firms, legal firms and merchant bankers to carry out due diligence on their behalf.

Given the expanded role of trustees over time, SEBI has proposed increasing the minimum number of trustees required to adequately perform their tasks. Currently, the minimum number of trustees required is 4.

How will investors benefit from this tightening of responsibilities of Mutual Fund Trustees?

According to SEBI, mutual fund regulations provide for some restrictions to address a few conflicts of interest like;

– Investment by mutual fund schemes in public issues of its sponsor, its associates and/or group companies

– Investment by Mutual Fund schemes for fund raising activates by such companies where its sponsor, associates or group companies are appointed as a merchant banker

– Sponsor influencing voting by Mutual Fund schemes in companies in which it has interest

– Mutual Fund availing services of its sponsor, associates and group companies at terms which are not at arm’s length

However, with changing times, there are some areas where Mutual Fund Trustees must pay special attention. The mutual fund’s property is held in trust by the board of trustees or trustee company for the benefit of the unit holders.

SEBI remarked that as the mutual fund sector grows in size and reach, trustees’ responsibility in unitholder protection becomes even more important. Once agreed upon, the trustees will ensure that the AMCs behave in a way that is not skewed in favour of the AMC’s stakeholders.

This step by the market regulator will ensure that trustees’ primary areas of concern will be the fairness of the AMC’s fees and expenses, as well as misconduct, such as market abuse or misuse of information by the AMC or AMC personnel or distributors. All of these factors will ensure that investors have a secure environment to execute their mutual fund investment transactions and avoid falling victim to any wrongdoing by any mutual fund house.

At present, there are two structures permitted for trustees under the mutual fund regulations:

1. Corporate structure

2. Board of trustees’ structure

Moreover, there are a few mutual fund houses which have a board of trustees structure, while the trustees of all other mutual funds have adopted the structure of a trustee company.

As stated in the consultation paper, “It may be desirable to have a corporate form for trustees in view of perpetuity and financial independence. In this regard, it is proposed to provide a period of one year for existing trustees with a board of trustee structure to convert into a trustee company, from a governance point of view and consistency in the applicability of provisions.”

SEBI has sought comments from the public till February 24 on these proposals to enhance the role and accountability of Mutual Fund Trustees.

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