{"id":976,"date":"2019-08-30T06:40:03","date_gmt":"2019-08-30T06:40:03","guid":{"rendered":"http:\/\/blog.certifiedfinancialguardian.com\/?p=976"},"modified":"2019-08-30T11:43:52","modified_gmt":"2019-08-30T11:43:52","slug":"a-loud-clear-message-to-the-mutual-fund-industry-by-the-sebi-chief","status":"publish","type":"post","link":"https:\/\/blog.certifiedfinancialguardian.com\/index.php\/2019\/08\/30\/a-loud-clear-message-to-the-mutual-fund-industry-by-the-sebi-chief\/","title":{"rendered":"A Loud & Clear Message To The Mutual Fund Industry By The SEBI Chief"},"content":{"rendered":"\n

At the AMFI Members Summit<\/a> held in Mumbai, on Aug 27, 2019, Mr Ajay Tyagi, the chairman of SEBI addressed the present members with an eloquent speech. In his speech he elaborated about the role of the Mutual Fund and its structure, stressed on investors\u2019 safety concerns, and pointed out to some hard-hitting facts of the overall industry. <\/p>\n\n\n\n

Mr Tyagi mentioned that the \u201cMutual Funds are one of the most important\ninstitutions through which money collected from various investors, especially\nretail investors are channelized into the capital market. The importance of\nMutual Funds can be seen through the sheer size of the AUM of the industry\nwhich stands at more than Rs 24.5 lakh crores today.\u201d <\/em><\/p>\n\n\n\n

In terms of growth, it has been phenomenal,\nspecifically in terms of the AUM and number of folios as on July 2019 as\ncompared to that of March 2015. <\/p>\n\n\n\n

Table: Growth in AUM and No\nof folios in 4 years<\/em><\/strong><\/em><\/strong><\/p>\n\n\n\n

\n \n <\/td>Values in 2015<\/strong><\/td>\n Values in 2019<\/strong>\n <\/td><\/tr>
\n Overall AUM<\/strong>\n <\/td>\n Rs 10 lakh crores\n <\/td>\n More than double of Rs 10 lakh crores\n <\/td><\/tr>
\n Equity AUM<\/strong>\n <\/td>Rs 3.5 lakh crores<\/td>\n Rs 7 lakh crores\n <\/td><\/tr>
\n Non-Equity AUM <\/strong>\n <\/td>Rs 7 lakh crores<\/td>\n Rs 17 Lakh crores\n <\/td><\/tr>
\n No of folios<\/strong>\n <\/td>4 crores<\/td>\n 8.5 crore.\n <\/td><\/tr><\/tbody><\/table><\/center>\n\n\n\n

(As stated in the speech of the SEBI document<\/a>)<\/p>\n\n\n\n

With the reference of the tagline, \u201cMutual Funds Sahi Hai\u201d<\/em>, Mr Tyagi said\nthat the investors reposed a lot of faith and trust in these funds, but the\nindustry must remember it takes years to build this trust, but even a single\nevent may erode it.<\/p>\n\n\n\n

Because SEBI took several initiatives, within a year with the sole intent to bring in more transparency and clarity for investors, in order to enable them to make better investment decisions in form of TER disclosures<\/a> and debt investments regulations. <\/p>\n\n\n\n

As until August 2018, the significant\ngrowth of the mutual fund industry was one of the most talked-about success stories of\ncapital markets in India. But since September 2018, several credit defaults by\nsome entities made headlines, it had an adverse impact across the financial\nsector in India. <\/p>\n\n\n\n

But, events in the last year also exposed\nthe fault lines in the industry and showed that a credit event in even one\nissuer or group could have a contagion effect leading to liquidity risk across\nthe market, he said.<\/p>\n\n\n\n

This further exposed the several risky\ninvestments, made by the industry in the quest for higher yields, as well as raised\nconcerns of the mutual fund exposure in debt and money market instruments with structured\nobligations or credit enhancements in various forms and complex structures. <\/p>\n\n\n\n

Owing to which it, \u201cled to a general\nerosion of trust of investors in debt schemes\u201d, and once again SEBI had to step\nin. <\/p>\n\n\n\n

\u201cSEBI\nundertook a review of the risk management framework of debt funds, especially\nliquid funds, and prudential norms governing investments in debt and money\nmarket instruments. The efforts focused on ensuring that the systemic risks\narising from such events are as minimal as possible. The measures included\npermitting the creation of segregated portfolios subject to certain conditions,\nreduction in cap of overall sectoral limits, minimum holding of 20% in liquid\ninstruments by liquid schemes, restrictions on investments in debt instruments\nwith structured obligations and credit enhancements, dispensing of valuation of\ndebt and money market instruments based on amortization, provision for graded\nexit load in liquid schemes, restriction on investments in unlisted equities,\nNCDs and CPs, etc. <\/em><\/p>\n\n\n\n

SEBI\nalso reviewed the existing valuation provisions to make them more reflective of\nthe realizable value, to bring in uniformity and consistency in approach,\nincrease the robustness of the process and address possible loopholes and\nmisuse of the provisions. Based on the review, it has been decided to take\ncertain measures including those relating to the waterfall approach for\nvaluation of non-traded money market and debt securities, flexibility for\nvaluation agencies to ensure fair pricing of securities while continuing to\nhave the final responsibility  on the AMC\nfor fair valuation, norms relating to valuation of Inter-scheme Transfers,\ndisallowing the use of own trades for valuation, etc<\/em>.\u201d<\/p>\n\n\n\n

To support his statement, he presented the\nfindings based on the SEBI\u2019s study which shows the AUM levels of the open-ended\ndebt schemes haven\u2019t revived to the levels seen until the end of the August\n2018.  Plus, he said, \u201cIt was observed that in 20% of the\ninstances, the average holding in liquid instruments was less than 5% of AUM as\ncompared to an average net redemption in these schemes of around 19%.\u201d<\/em> <\/p>\n\n\n\n

Further Mr Tyagi even spoke of risk aspect\nof investments made in debt schemes; \u201cThere\nis a clear distinction between lending and investing. A mutual fund\u2019s\ninvestment strategy needs to have the required elements of safety as well as\nreturns. While making an investment, the mutual funds have to necessarily take\ninto account their mandate and organizational structure. Mutual Funds do not\nhave risk capital and are essentially pass-through vehicles wherein NAV ought\nto reflect the correct value of assets held at any time. This is an important\naspect which Mutual Funds should keep in mind while making debt investments\u201d<\/em>\n<\/p>\n\n\n\n

[Read<\/strong>: How SEBI\u2019s New Norms on Debt Mutual Funds Make A High Impact<\/a>]<\/p>\n\n\n\n

He pointed out to one of the crucial roles of\nthe Trustees in the structure of the Mutual Fund industry, to step up as \u201cthe\nfirst level of gatekeepers\u201d, by following a certain element of self-discipline\nwithin the industry and not be passive participants in the MF ecosystem.<\/p>\n\n\n\n

The Trustees are expected to take remedial\nsteps and corrective measure along with intimations to SEBI to avert any fund\ninvestment crisis, when there are concerns and lapses.  <\/p>\n\n\n\n

\u201cWhile\nwe have taken steps to restrict such investments, the industry as a whole needs\nto do its own analysis on a regular basis to avoid such situations in future.<\/em>\u201d\n <\/p>\n\n\n\n

The\nrole of Trustees is pivotal in the Mutual Fund ecosystem. The designing of the\ntrio Mutual Fund structure with the fund-AMC-trustee as its constituents was a\nconscious call on SEBI\u2019s part wherein the fund was to be the pooling structure,\nAMC was to handle the management and operations of the fund and the trustee was\nto act as an overseeing authority on an independent basis as a fiduciary of the\nMF investors. <\/em><\/p>\n\n\n\n

The\nMutual Fund Regulations cast enormous responsibility upon the Trustees. One\nparticular regulation I would like to highlight is Regulation 18 (10) of these\nRegulations which states that where the trustees have reason to believe that\nthe conduct of business of the Mutual Fund is not in accordance with the\nregulations and the schemes, they shall forthwith take such remedial steps as\nare necessary and immediately inform SEBI of the violation and action taken by\nthem.<\/em><\/p>\n\n\n\n

Going\nforward, I hope to see greater proactivity on the part of Trustees where there\nare such concerns and lapses. However, a balance is required so that it does\nnot hinder the day-to-day operations and fund management activities.\u201d<\/em><\/p>\n\n\n\n

Views\non outreach and ease of doing business!<\/strong><\/p>\n\n\n\n

In terms of geographical spread, the challenge\ncontinues in the B-30 centres, as the penetration is low for B-30 as compared\nto B- 15. And currently, the time is ripe to focus on the B-30 centres, and to\nattract more investors.  With regards to it\nMr Tyagi added, \u201cSEBI has already revised\nits norms permitting 30 bps additional TER for B-30 only be permitted based on\nB-30 inflows from retail investors.<\/em>\u201d <\/p>\n\n\n\n

Also, among investor types, women and\nmillennials are significant constituents that are highly untapped. So, to tap\nsuch investors, other factors such as education, regional differences, marital\nstatus, and children, etc. play a vital influence in investment decisions in\ndifferent ways. <\/p>\n\n\n\n

Hence, targeted programmes for various type\nof investors could be a good way to attract such specific investors into the mutual\nfunds’ space. <\/p>\n\n\n\n

Besides, despite all the measures taken\ntill date by both SEBI and the industry, the numbers with respect to direct\nplans are not very encouraging; and for ETF investments, not much progress has\nbeen made. <\/p>\n\n\n\n

He addressed the recent government’s announcement<\/a> of improving market access for the domestic retail investors by permitting Aadhar-based KYC to the opening of demat account and making investment in mutual funds and said that SEBI will work with the government on this with a view to operationalizing the decision.<\/p>\n\n\n\n

Months earlier, SEBI with multiple\nstakeholders had formed a working group to ease the process of investing in\nmutual funds further. The group has since submitted the report and we are in a\nprocess of implementing its recommendations, he said. <\/p>\n\n\n\n

Mr Tyagi even spoke about Mutual Fund\u2019s\nrole as a stewardship that is important. Since Mutual Funds invest in the\ncapital markets as institutional investors, they have a fiduciary\nresponsibility towards thousands of investors who have put in their money in\nthe fund. <\/p>\n\n\n\n

And ever since SEBI introduced the\ndisclosure of voting policy and voting decisions, SEBI has seen an increase in\nparticipation of mutual funds in voting on shareholder resolutions. So mutual\nfunds can play an important role in improving governance by fulfilling their\nstewardship obligations. <\/p>\n\n\n\n

My Take:<\/em><\/strong><\/p>\n\n\n\n

Mutual Fund being a collective pool for\nretail investors to invest their hard-earned money directly into the capital\nmarkets.  All the participants of the\nindustry – advisers, mutual funds, AMCs, Trustees, must follow the best of fiduciary\nstandards and practices within the regulatory framework to provide ethical and\nneed based advice to add value with credibility. <\/p>\n\n\n\n

Another most crucial aspect, which even Mr\nTyagi pointed out is \u201cfaith and trust in Mutual Funds\u201d.  Trust is the integral core and building trust\nand gaining the respect of investors\/clients is a prolonged process. So, a collective\neffort should be taken to uphold and maintain that trust and faith of investors\nat all times.<\/p>\n\n\n\n

[Read<\/strong>: Earning Trust \u2013 The Only Thing That Can Get IFAs Going In Challenging Times<\/a>]<\/p>\n","protected":false},"excerpt":{"rendered":"

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