Sebi pulls up mutual fund industry over dividend distribution practice

Sebi. (Photo: Kamlesh Pednekar)
The Securities and Exchange Board of India (Sebi) on Wednesday pulled up the mutual fund industry over the practice of distributing dividends without the consent of trustees.  According to sources, the market watchdog took a serious view of this breach during a meeting with independent trustees, who sit on the boards of asset management companies (AMCs).

The meeting was attended by Ajay Tyagi, chairman, Sebi, Madhabi Puri Buch, whole time member, Sebi and more than 80 independent trustees. It was the first meeting between independent trustees and the Sebi chairman Ajay Tyagi.

Tyagi said that the primary reason for calling the meeting was to make sure that MFs have good governance standards and highlighted the importance of safeguarding investors’ interests.

Sebi presented findings of its recent inspection report, highlighting 25 critical violations committed by the industry participants in recent years. The lapse in distributing dividends was on top of that list, with Sebi officials highlighting the need for a larger discussion on this matter.

The Sebi had recently sent out findings of its inspection report to chief executive officers (CEOs) of all fund houses, warning them against several breaches committed and demanding corrective actions.

Sebi has observed there were several instances where either the trustees' approval for dividend distribution was not obtained or the power of trustees were delegated to the officials of AMC to declare and fix the record date as well as decide the quantum of dividend under various schemes of the fund.

Dhirendra Kumar, CEO of MF tracker, Value Research, said the market regulator wants the MF industry to not only follow the regulations on paper, but also in spirit. Recently, the balanced funds category saw mis-selling as these schemes were sold on assurance of one per cent monthly dividend yield.

According to CEO of a mid-sized fund house, besides presenting the inspection report, the regulator explained the independent trustees about their role as ‘first-line regulators’.

According to a top industry official, Sebi chief directed independent trustees to conduct technology audits of the AMCs to prevent any possibility of online frauds. The official cited above said that the regulator wants to make sure that its push towards digital is not compromised by any unforeseen events.

“There can be cases where investment is done from one account and redemption is done from another. The regulator wants to make sure that such instances don’t happen, especially in smaller towns where investors can be more vulnerable to online frauds,” Kumar added.

Tyagi said there was no specific discussion on distributor commissions, however, Sebi would take up the issue with industry body Association of Mutual Funds in India (Amfi) at a meeting next month.

The regulator also emphasized on the need for improving registrar and transfer agents (RTA) reconciliation, whereby the units allotted by the RTAs didn’t match the money lying with the fund houses in real time.  

“The MF industry is a good story and we must make sure that it continues,” Tyagi said.