Market regulator does not want them to be ‘passive participants’
SEBI Chairman Ajay Tyagi and his team of officials that oversees mutual funds led by one of his four main lieutenants, Madhabi Puri Buch, may be finding themselves in a Catch-22 situation these past few months.
It takes quite a balancing act figuring out the extent to which to regulate, when to intervene and how much to let go, while keeping an eagle’s eye on the goings-on in the debt mutual fund (MF) industry.
The Indian MF industry has been rocked by the credit crisis in the non-banking finance sector where some debt funds have been caught holding instruments that have either delayed interest and/or principal payments and have seen their credit ratings fall. The excess risk that many credit risk funds have been taking these past years — and a few other debt schemes too joined the party to earn the extra buck — came to haunt the MF industry as many such funds saw their net asset value (NAV) fall.
According to Morningstar India, although the stressed assets accounted for just 5.53 percent of the overall debt fund assets as of July 2019, credit and medium duration schemes have witnessed consistent net outflows (i.e., outflows exceeded inflows) between January and July 2019. Clearly, there has been a crisis of confidence.
Under watchful eyes
Despite SEBI (Securities and Exchange Board of India) stepping in recent months — revising and strengthening its guidelines — debt funds still appear to be on the watchful radar of Team Madhabi. On August 27, at the annual general meeting of industry body Association of Mutual Funds of India (AMFI), SEBI also called the trustees of mutual funds and had a separate closed-door session with them.
Typically, trustees are not invited to be part of AMFI’s AGM, which is held to approve the trade body’s books of accounts, appoint auditors, if required, and appoint directors when incumbents retire. AMFI’s board has 15 directors — all appointed from a pool of chief executive officers (CEOs) of 44 asset management companies. The SEBI chairman addresses mutual fund CEOs and officials.
This year, Tyagi reminded fund houses, among other things, that it has in fact not grown as much as it ought to have. He reminded asset management companies (AMCs) that the difference in the expense ratios of direct and regular plans were not exactly to the extent of distribution expenses and commissions paid, as they should be. The SEBI chairman’s displeasure on the slow-paced progress in direct plans was quite evident.
Of course, in a country like India, where there is a large bouquet of assured-return financial instruments and the penetration of mutual funds is still modest, the growth of direct plans is bound to be slower.
Moving on, Tyagi also reminded AMCs that they ought to do more in promoting exchange-traded funds.
After such routine issues, Tyagi turned his attention to the elephant in the room: the debt funds. He said SEBI has taken measures to ensure debt funds don’t stray off the path of taking measured risks and reminded AMCs that investing is not the same as lending. The chairman reiterated that mutual funds should uphold their fiduciary duty and protect the investor’s interest first.
Calling trustees to action
Later, after a motivational speech from an ex-Armyman followed by lunch, the audience was divided into two. While the fund CEOs or their proxies were huddled in a room to conduct their usual AGM business, the trustees gathered in another room. The trustees’ gathering was addressed by Madhabi. No other AMC official was meant to be in this gathering, barring a few SEBI officials who were already present.
Meanwhile, the AGM took about half an hour and the crowd dispersed and went home while the trustees’ meeting with Madhabi was still going on. We’re yet to hear the finer details of what was said in this meeting. But it’s safe to assume that SEBI wants trustees to be more active in their role as guardians of mutual funds – a point that Tyagi too raised in his speech that morning.
And why not? The Indian MF industry’s unique structure provides trustees with sweeping powers to monitor the funds and question the management over all the decisions they take. As such, the trustees are answerable directly to SEBI and not to the fund house. Regulation 18 of the SEBI guidelines define the role of trustees in detail, a list that nearly runs into five pages.
Earlier in his speech, Tyagi had turned his attention to one particular section in these guidelines that says, “where the trustees have reason to believe that the conduct of business of the Mutual Fund is not in accordance with the regulations and the schemes, they shall forthwith take such remedial steps as are necessary and immediately inform SEBI of the violation and action taken by them”. Here’s where some trustees have been “passive participants”, but could have done more, in Tyagi’s opinion.
It’s important to remember that SEBI has, over the years, reminded trustees about their roles and responsibilities. But it was way back in 2010 that the then chairman C B Bhave, and K N Vaidyanathan, SEBI’s executive director at the time, had started to engage with trustees in a manner not seen up until then. Workshops and one-on-one interactions were being held and more were planned to sensitise trustees about their responsibilities in an endeavour to make them more active.
“It’s all about getting back to basics; about getting trustees to understand their fiduciary responsibility. Over the years, the asset management business has gone in several directions — building assets under management, launching new products, pampering distributors, bothering about their valuation and so on. It’s time we go back to basics,” Vaidyanathan had told this reporter then.
Perhaps, it’s time for us to go back to the basics, once more. And ask questions.
