Sebi panel to discuss select MF products on 31 May

Sebi had sought proposals from AMCs regarding selling of equity options

A committee of market regulator Sebi will consider the issue of restricting mutual funds (MFs) from selling an equity product that involves betting on future prices.

The Sebi Mutual Fund Advisory Committee is concerned that this is not mutual funds’ core activity and may take a decision on 31 May.

Equity options is a derivative product where investors bet on future value of stocks or their indices and Sebi is against mutual funds getting into the hedging business, as it could suffer losses.

In a letter sent to all fund houses recently, Sebi had sought proposals from asset management companies (AMCs), regarding selling of equity options and an increased disclosure of their investment in this segment, sources in fund houses said.

Mutual funds have already submitted their view to Sebi and they may be reviewed at the Sebi’s Mutual Fund Advisory Committee meeting scheduled on 31 May.

“MF industry body Association of Mutual Funds of India (AMFI) has already submitted its views in consultation with industry players. The proposal would be discussed on 31 May,” a Sebi source said on condition of anonymity.

The market regulator on its part wants the fund houses to control the risk exposure and clearly demarcate their risky exposure, he added.

Industry players said, “Sebi has been looking at ways and means of regulating distribution of MF products and also MFs investment in derivatives.”

The steps are part of Sebi’s move to control the risk taken by MFs, analysts said.

Selling an option usually involve huge losses as the underwriter gets exposed to unlimited risks when market becomes volatile or collapses or hits the upper circuit.

“The objective of Sebi could be to ensure that MFs can hedge by buying options, but they should not underwrite the option as it is not the core business of MFs to take risk this way,” an analyst at a brokerage house said.

In order to increase accountability on the part of fund houses, the market regulator had last week asked AMCs to disclose the details of investor complaints on websites, as well as in annual reports.

Now all AMCs will have to put up the data for the bygone fiscal by 30 June 2010, and for each new fiscal within two month of the close of the fiscal year.

In order to increase investor interest in MFs, the market regulator had last year abolished entry load and asked fund houses not to deduct marketing and distribution charges from the investment made by customers.

Source: http://www.livemint.com/2010/05/17142235/Sebi-panel-to-discuss-select-M.html