👍👍Short-term pain | The Financial Express

Clipped from: https://www.financialexpress.com/opinion/short-term-pain/2992188/

Sebi’s forensic audit move has upset fund houses, but it might lead to long-term gains by raising the trust quotient

sebi, marketsThe latest move comes on the heels of Sebi’s proposal to hold the trustees of AMCs more accountable for safeguarding the interests of unit holders. (IE)

The Securities and Exchange Board of India’s (Sebi’s) recent tender inviting audit firms to do a forensic audit of mutual funds houses, their asset management companies (AMCs), and trustee entities/board of trustees has caused quite a bit of flutter among the industry players. In the past month, Sebi auditors have been visiting fund houses individually and seeking call records and other data. A forensic audit just takes the process a step ahead. Predictably, the fund houses are upset as they believe that the entire industry cannot be blamed for the lax behaviour of a few. The Sebi move comes in the wake of the unfortunate events at Franklin Templeton India Mutual Fund and Axis Mutual Fund in the last 2-3 years.

There is some merit in the argument of fund houses as there are a few bad apples across industries in the financial sector. The insurance sector, for one, has faced severe criticism over the years for massive mis-selling of products to policyholders. In fact, reams have been written about how even the retired have not been spared by some rogue agents. They are also allowed to charge much higher commissions–something that has been a sore point with the mutual fund industry. Moreover, fund houses feel that the stock market regulator has been harsher with them, unlike other regulators like the Insurance Regulatory Development Authority of India. After all, insurance companies are also custodians of public money and there have been complaints over their opacity for many years. There is a general perception among fund houses that Irdai is kinder as a regulator, leading to more people wanting to be insurance agents, and thereby creating a regulatory arbitrage.

However, the point that the mutual fund industry is missing is that quite a few of them have indeed crossed the line on their fiduciary obligations. The main worry has been front running and there is no doubt that some of the fund houses follow guidelines only in letter and not in spirit, necessitating a strong message from the regulator. The mutual fund industry manages around `40 trillion–a rise of 5x in the past decade–and hence, it is no longer a group of mom-and-pop stores that can set their own rules. Millions of retail investors have put their hard-earn money into schemes of fund houses to meet their various goals–be it education of their children or saving for retirement corpus or any other. So, it is extremely important that their money is protected at all costs.

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The latest move comes on the heels of Sebi’s proposal to hold the trustees of AMCs more accountable for safeguarding the interests of unit holders. In an earlier consultation paper, the regulator had proposed that trustees of mutual funds should focus on market abuse by AMC, and its employees and mis-selling by AMC to increase the asset base. It is also worried that some AMCs are giving extra money to distributors to influence existing gullible investors to exit good schemes and buy new fund offers. And there are chances that the market regulator could have a further cap on the total expense ratio. Fund houses should look at Sebi’s step as an opportunity to come clean in front of both the regulator and investors. Yes, this may mean some short-term pain but building confidence among investors will only give them long-term gain.

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