MFs must tighten controls to prevent front-running

Back in June this year, market regulator Securities and Exchange Board of India (Sebi) revealed that an investigation had revealed that an equities dealer at HDFC Mutual Fund had been misusing his position to illegally make money in the stock markets.

This dealer would leak advance information of the mutual funds’ stock trades to his accomplices. They would then buy and sell before HDFC Mutual Fund itself did, thereby making money for themselves while causing incidental loss to the mutual fund, or rather, to the mutual fund’s investors.

At that time, Sebi fined HDFC Mutual Fund and banned Nilesh Kapadia (the rogue dealer) from participating in the securities market. It also asked HDFC to overhaul its internal controls and procedures to ensure that this sort of thing didn’t happen again.

I had heard that the incident had triggered panicked reaction in a large number of businesses that trade in equities on behalf of investors. Mutual funds, portfolio management services and insurance companies scrambled to figure out how vulnerable they were to something like this.

From what I know, many of them came to the conclusion that they could not guarantee that a determined and clever operator would not do the same thing. However, as far as investors were concerned, the matter seemed to blow over. Certainly, HDFC Mutual Fund itself seems to have gotten away without any detectable damage to its image among investors.

However, a couple of days ago, a more alarming piece of news has come out. Sebi has stated that it is now engaged in investigating 10 more mutual funds companies for possible cases of front-running. At this stage, they are just investigating and Sebi may or may not discover any actual wrong-doing. Also, it is notable that Sebi did not come out with this information willingly. Instead, it revealed it only in response to an Right To Information (RTI) request by a newspaper.

However, no matter how the investigations go, it is clear that front-running can only be curbed by organisations if they are internally committed to doing so. One important component of this commitment is that such actions should get exemplary punishment. Not just that, the responsibility for laxity in internal controls should actually be considered the real cause for losses suffered by investors. And these things should be done and not just seen as being done.
Those who manage other people’s money have a finite amount of trust and trust once spent is hard to earn back.

Source: http://economictimes.indiatimes.com/personal-finance/mutual-funds/analysis/MFs-must-tighten-controls-to-prevent-front-running/articleshow/6726754.cms

Amfi to become self-regulatory

No longer content with being just an industry association and trade body for the Rs7.13 trillion mutual fund industry, the Association of Mutual Funds in India (Amfi) is taking baby-steps towards becoming a self-regulatory organization.

In an interview, newly elected Amfi chairman U.K. Sinha refused to specify a time frame for the planned transformation, but said the objective is on his agenda. “The capital market regulator, Securities and Exchange Board of India (Sebi), has been asking Amfi to do this for quite some time. We’ll consult Sebi on the matter and soon start the groundwork to move in this direction,” he said.

Sebi now regulates mutual funds, but Sinha says the industry, with 41 asset management companies and at least 100,000 distributors, is too large and intricate for the market regulator to oversee every detail.

Amfi must move beyond being just an industry body. We have to engage other players who are on the periphery. Presently Amfi doesn’t have any representation from distributors or registrar and transfer agents. Ultimately Amfi must become a self-regulatory organization (SRO). We have also started talking to Sebi (Securities and Exchange Board of India) more actively. We would also like to work towards developing a mutual fund (MF) policy.

Tell us more about this policy.

For a variety of reasons, we observe that MFs are being perceived as a short-term vehicle and it is an aggregator for liquid assets of firms. That is just one part of our overall existence; to say that that is our only objective is a wrong impression. I protest.

The policy statement will define the industry’s role, list out measures to reach out to small towns, small investors, the MF industry’s obligations and thereafter its responsibilities. We have seen policies in the banking, civil aviation, insurance and even the pension sector.

Do such policies work? Many still can’t borrow from banks, non-remunerative flight sectors go empty. However, mobile phones (an area without policy) get penetration. Aren’t we going back 25 years?

I don’t think we can call these examples as failures. Maybe they have not been able to meet their expectations. For instance, if 40% of a bank’s advances has to go to the priority sector, banks have to set aside that money. Whether it reaches the final destination can be a question we can ask.

MF pension products are excluded from the tax deduction instruments under the new Direct Taxes Code. What also hurts the MFs is the differential treatment. There will be no harm to get clarity on this from the government and the regulator.

But, despite tight regulations and strong performance, why is it so difficult to get your message across to the investor?

Low financial literacy is a problem. Competitive products can offer incentives; the MF industry can’t. Since 2003, when the markets were going up, there has never been a year when retail equity inflows in the industry has been negative. But since last one year, the retail equity inflows has been negative. In fact, we are losing around Rs3,000 crore per month on average. The number of folios is dwindling. This is also why the New Pension Scheme has not taken off despite being a good product because there is no incentive for distributors. So we have to recognize that if there are other products where it’s possible for people selling them to be incentivized in a better way, a product which doesn’t pay incentives—no matter how good it is—will be at a disadvantage.

Are we talking of a move back to a system of paying incentives?

It is too early to comment on how the policy would shape up on this issue, but I am flagging this is as one of the issues. Fortunately, we have evidence of the past 15 years. If the government or the regulator is convinced that MF is a good product for retail investors, then a suitable incentive plan can be devised.

Would an incentive-based structure address the problems of mis-selling if adviser regulations are in place?

Yes it would. The absence of distributor regulation is a big lacuna.

Would Amfi—as an SRO—be interested in taking the leading and devising distributor regulations, at least for distributors selling MFs?

We have not discussed this with Sebi or with the distribution industry; I’d be speaking out of turn, if I say we will do this. Though I think Amfi should move in that direction.

Source: http://www.livemint.com/2010/10/11000607/Amfi-to-become-selfregulatory.html?h=A1

Making MF transfers easy — Nominee for your funds

Registering a nomination facilitates easy transfer of funds to the nominee on the demise of the investor.

What is a Nomination?

An investor can nominate a person(s) called nominee(s) to whom his/her Mutual Fund Units will be transferred on his / her demise.

Mutual Fund units get transferred to the nominee registered in the folio on the demise of the Investor.

What are the benefits of registering a nomination?

Registering a nomination facilitates easy transfer of funds to the nominee(s) on the demise of the investor. In the absence of the nominee, a claimant would have to produce a host of documents like a Will, Legal Heir-ship Certificate, No-objection Certificate from other legal heirs etc. to get the units transferred. The process is simple if a nominee is registered in the folio.

How can an investor make a nomination?

Nomination can be registered at the time of purchasing the units. While filling in the application form, there is a provision to fill in the nomination details.

Alternatively, an investor may register a nomination later through a form which may be submitted with relevant particulars of the nominee.

The forms are available on the mutual fund websites.

Investors may also request the registrar and transfer agent to send a form.

Can an investor make multiple nominations?

Yes! An investor may make up to three nominations and even specify the percentage of the amounts that will go to each nominee.

If the percentage is not specified, equal shares will go to the nominees.

Can a minor be a nominee?

Yes! A minor can be a nominee. However the guardian will have to be specified in the nomination form.

Can a nomination be changed?

A nomination can be changed and even cancelled. The relevant form should be filled and submitted to the Registrar or Mutual Fund Office.

If an investor has different schemes in a folio, will all units of all schemes be transferred to the nominee?

A nomination is at folio level and all units in the folio will be transferred to the nominee(s).

If an investor makes a further investment in the same folio, the nomination is applicable to the new units also.

Who can nominate and who is eligible to be a nominee?

Nominations can be made only by individuals applying for / holding units on their own behalf, singly or jointly.

Non-individuals, including societies, trusts, body corporates, partnership firms, the karta of an HUF, and the holder of a power of attorney (POA) cannot nominate.

Nomination can be in favour of individuals, including minors, the Central Government, State Government, a local authority, any person designated by virtue of his office or a religious or charitable trust.

A non-resident Indian can be a nominee, subject to the exchange control regulations in force from time to time.

Source: http://www.thehindubusinessline.com/iw/2010/10/10/stories/2010101051320800.htm