SEBI wants MF trustees to crack the whip on poor performance  

May 19, 2010

The Securities and Exchange Board of India (SEBI) seems to have woken up to the fact that the lackadaisical performance and herd mentality of the Indian mutual fund (MF) industry is primarily due to the lack of accountability of asset management companies (AMCs), whose earnings are directly related to the corpus they manage and totally unrelated to fund performance. In an exclusive interview with Moneylife, SEBI executive director KN Vaidyanathan said the regulator is working out the modalities for making trustees of mutual funds more accountable for fund performance.

“The entire centerpiece of the mutual fund model in India is the mutual fund trust. The money is given to the trustees in trust to manage. But trustees have to get more active about performance record,” Mr Vaidyanathan said.

Under the current SEBI norms governing mutual funds, the board of trustees of a fund is entrusted with the task of monitoring fund performance and helping redress investor grievances in close collaboration with the regulator. Two-thirds of the directors of an MF’s board of trustees must be ‘independent’, that is, they should not be associated with the sponsors of the fund; also, 50% of the directors of the AMC must be independent. The names of the AMC’s directors and trustees must be mentioned in the fund’s offer document. Significantly, the existing norms even empower the board of trustees to sack the AMC’s board of directors for not safeguarding investor interests or for non-adherence to SEBI norms. But all of this power has remained only on paper and there is no precedent of the trustees of a fund sacking the AMC’s board for non-performance.

Mr Vaidyanathan said the new guidelines would require AMCs to disclose all information related to portfolio churn and risk-adjusted measures so that trustees can act on the basis of this information.

Under the existing mechanism, the auditors of a fund send their inspection reports of the fund’s performance to SEBI which, in turn, forwards them to the AMC. The AMC’s views and comments are sent back to SEBI and they are then passed on to the fund’s trustees so that they can evaluate the fund’s performance and suggest corrective measures. “This made no sense. We have changed the process,” Mr Vaidyanathan said. “We said that the comments would all go to the trustees and they will have to respond directly to us. We have met the trustees of least 15-20 funds and have asked them: what do you do on performance? When an AMC says that we have these five top-performing funds, do you ask them what about the 10 others that are not performing? In fact, we are also telling everybody to raise the bar on analytics of fund performance.”

Admitting that sponsors who have no performance track record in the financial services business have gotten into the mutual funds business, Mr Vaidyanathan said the regulator has tightened the entry norms for fund sponsors. “Sponsors used to have a clever way around. They used to hold a 39% stake, probably with side agreements with other investors. We have tightened it. We have said that anybody with 10% shareholding, and/or a director and/or a brand name will be treated as sponsors. At least three fund companies have had to change their plans because of this. We are insisting on customer track record of financial services,” he said. He clarified that the new norms would apply only to new entrants. 

— Debashis Basu