Sebi warns heads of asset management companies against 25 violations

Photo: Kamlesh Pednekar
The Securities and Exchange Board of India (Sebi) has written to the heads of asset management companies (AMCs), warning against 25 malpractices committed by the Rs 23-trillion industry. The regulator, in a four-page letter dated July 9, has also warned fund houses against breaches and demanded corrective measures. The letter, reviewed by Business Standard, has been sent to the chief executive officers (CEOs) of all fund houses, along with the chairman of industry body Association of Mutual Funds in India (AMFI).

Industry players say the latest communication is to send a signal that the market watchdog is closely monitoring all the decisions and practices by the 42-player industry. 

Some of the key violations flagged by Sebi include failure to inform transactions with associate companies; hike in investment limits towards debt securities issued by a single issuer; investing in deposits of a bank which invests in the same scheme; false categorisation of assets to pocket higher expense ratios; and instances of inter-scheme transfers to manage lack of liquidity in bond market. 
The list of violations was prepared by Sebi, following an inspection of fund houses between April 2014 and March 2016.

The regulator has also discussed these issues with the AMCs and their trustees.

The move comes amid recent action by the regulator against big fund houses such as HDFC Mutual Fund over a share allotment to distributors ahead of its initial public offer (IPO) and ICICI Prudential MF over its investment in the IPO of associate company ICICI Securities. 

Sources said Sebi has become more cautious amid the pace at which the industry has grown and size it has attained in the last few years. To put things in perspective, mutual fund assets currently account for more than a fifth of the banking system deposits. 

The issues highlighted by Sebi are pertinent in the current context, said Vidya Bala, head of mutual fund research, FundsIndia. 

“There are instances of violations where a scheme takes disproportionate exposure to a single issuer. Also, there is a case for AMCs to make more disclosures when they are investing in their group companies. They need to prove that the investment they are making is completely at arms’ length and the only motive is the attractiveness of the investment,” said Bala.

Another expert suggested the practice of schemes investing in short-term deposits of banks, which in turn invest in the same scheme, could lead to round-tripping of funds. 

“Inter-scheme transfer of investments has been practiced since last two decades. It is not just to manage liquidity for bond market investments, but there are quite a few instances on the equity side as well," Bala said. In 2017-18, value of inter-scheme transfers in the debt segment stood at Rs 1.67 trillion.

Some of the other issues highlighted by Sebi include non-compliance of KYC norms; instances of borrowing for purposes other than allowed under the regulations; failure to conduct periodical review of performance of various schemes. Furthermore, allowing entities barred from accessing the securities market to transact in mutual funds; charging inappropriate expenses under investor education awareness programmes; and close-ended schemes investing in assets that have maturity beyond the scheme’s maturity. 

“Members are advised to take corrective actions in respect of the observations listed as above. Further, members may be advised to ensure strict compliance with the Sebi Regulations and all the circulars issued by Sebi. Any repetition of violations or non-compliance…would be viewed seriously,” the regulator said in the letter.