Mutual Funds: Sebi switches into micro-regulating mode

Redemptions by investors, alongside adverse global and domestic woes have resulted in a 16.5 per cent shrinkage in the size of the Indian mutual fund industry. From Rs 703,669 crore in March 2011, the industry's assets under management (AUM) have come down to Rs 587,659 crore in March 2012.

A gathering of mutual fund industry insiders was delighted and cheered when Upendra Kumar Sinha, Chairman of the Securities and Exchange Board of India (SEBI) sympathised that "We at Sebi are concerned about the state of the mutual funds' industry."

Sinha was speaking at the eighth annual mutual fund summit, organised by the Confederation of Indian Industry (CII), in Mumbai. The gathering seemed even more happy when Sinha mentioned that Sebihad suggested to the government that investments under the Rajiv Gandhi Equity Savings Scheme, announced in the union budget this year, be routed through the mutual fund route.

But this happiness did not last for long. Sinha denied that Sebi regulations are the reason for the dilapidated state of the Indian mutual fund industry . "Sebihas not been on a regulatory overdrive, if the industry feels so," Sinha insisted.

And then came the thrashing from Sinha, which is unlikely from a regulator. Although he didn't name any particular asset management company (AMC) as an offender, Sinha said that Sebi's inspection had uncovered nine AMCs whose majority of schemes (over 50 per cent or even all the schemes) have been underperforming their respective scheme benchmarks for three years in a row. Sinha further added that there are other nine AMCs where up to 50 per cent of the schemes have underperformed their benchmarks for three years.

"This cannot be allowed by regulator to go on and on and such fund houses must take corrective action," said Sinha. On its part, Sinha added that Sebiwill engage with fund house chiefs and fund managers whose schemes are consistently underperforming benchmarks. "There can be short-term vagaries but consistent underperformance is a matter of concern," Sinha said, giving the example of one scheme which has underperformed since its inception.

And underperformance was not Sinha's only critical observation. "There are conflicting situations," he said, citing a case where one single investor accounted for over 25 per cent - the maximum permissible limit - of a particular scheme's AUM. Sinha cited another case of non-compliance where portion of a particular mutual fund scheme's AUM was invested in a fixed deposit of a bank which was one of the investors in the same scheme.

"Majority of the industry is not violating," says Sinha. "This is a small group of AMCs which are not following the rules," he added. But Sinha has sent a clear signal that Sebi is intolerant. "Going forward we plan to do the inspections more intensely," said Sinha. Clearly, Sebi has switched into micro-regulating mode.

Source: http://businesstoday.intoday.in/story/sebi-switches-into-micro-regulating-mode-for-nutual-funds/1/185730.html

Sebi raises concerns about MF sector, performance of schemes

Sebi chairman U.K. Sinha says 50% of the schemes of nine fund houses have underperformed their benchmark indices and there were nine other fund houses where up to 50% of the schemes were underperformed by their respective benchmark indices

The Securities and Exchange Board of India (Sebi) on Thursday raised concerns about the performance of mutual fund (MF) schemes and non-compliance at some fund houses in the Rs 6.64 trillion asset management industry that has been demanding friendlier regulations ever since the regulator scrapped entry fees in August 2009.

While acknowledging sluggish investment sentiment in the market, Sebi said it’s also concerned about the industry and has reached out to stakeholders in recent months for suggestions to revive the industry’s growth. While doing this, the capital market regulator felt that the industry should also highlight the performance of its schemes. According to Sebi, there were several fund houses whose schemes were beaten by their own benchmark indices.

“This should be a cause of concern. Sebi is going to engage with these fund houses... as to why on a consistent basis their schemes have not performed,” said U.K. Sinha, chairman, Sebi.

He said over 50% of the schemes of nine fund houses have underperformed their benchmark indices and there were nine other fund houses where up to 50% of the schemes were underperformed by their respective benchmark indices.

“Some AMCs’ (asset management companies) schemes have underperformed since inception. Sebi will engage with them and ask what measures they are taking to address the issue. We will perhaps review their performance on a half-yearly or annual basis,” Sinha said at industry lobby Confederation of Indian Industry’s annual mutual fund summit.

Moreover, Sebi was concerned about fund houses flouting regulations on several fronts in recent months. “One scheme even had a single entity investing at least 25% of the assets under management (AUM) in the scheme. Then we found that a mutual fund was investing money in the fixed deposit of a large bank, which itself is an investor in the fund,” Sinha said. Rules stipulate that a single investor can only invest up to 25% of the AUM in a mutual fund scheme.

Sinha said the losses of certain mutual fund schemes were being transferred to other schemes. “This can’t go on and Sebi will not be silent on these issues,” Sinha said.

At least three fund houses refused to comment citing the sensitivity of the issue.

Sinha reiterated that the regulator will not come in the way of the industry’s growth.

The market regulator recently met members of the mutual fund industry for suggestions on reviving growth. Sinha said that Sebi will shortly take actions in line with the suggestions it received.

“We have received several suggestions and most of them (industry participants) are against reintroduction of entry loads,” he said.

Removed by Sebi in August 2009, entry fees were charges (up to 2.25%) that mutual funds collected at the time of investment from the investor, and eventually passed on to the distributor as commissions.

“We have been advocating for a variable load. There are different types of investors with varied appetite and needs. So we need a variable load structure in place,” said Anthony Heredia, managing director, Morgan Stanley Investment Management Pvt. Ltd. “But the overall growth story of the fund industry is intact. For instance, once the interest rates come down, we should start seeing the return of bond funds. The next 12-18 months could be difficult for the markets, but we see a strong five-year story with the asset base multiplying manifold at this rate of growth and savings behaviour in the economy.”

Sinha urged the industry to bring in pension-oriented funds as they have a large pool of money and a longer investment horizon.

Sebi said that it is in discussions with the income tax authorities to treat such mutual fund schemes at par with pension products in terms of tax rebates. But the industry sounded reluctant to introduce such products.

“Pension money comes in as investments for 20 years. Fund managers want immediate commissions,” said Dhirendra Kumar, chief executive officer, Value Research Online, a Delhi-based mutual fund tracker.

The regulator is also in the process of formalizing regulations for investment advisers. Indian financial regulators have been working on a comprehensive set of regulations for investment advisory services that straddle financial products. Last year, Sebi had circulated a concept paper on investment advisory regulations.

Sinha said that Sebi officials recently met those of the Financial Stability and Development Council (FSDC), which has broadly accepted Sebi’s suggestions on investment advisory, and the market regulator will shortly introduce the final set of rules.

The regulator is also working on guidelines for initial public offerings (IPOs), Sinha said. “We are looking at how to increase the penetration of IPOs and ensure enhanced investor protection. We will come out with detailed guidelines in two-three months. Our job is to ensure that the rules of the game are played properly.”

Taking note of slowing foreign investment through participatory notes or PNs, Sinha said the regulator and the government are actively trying to encourage foreign investment through the recently introduced channel called qualified foreign investor route.

Source: http://www.livemint.com/2012/06/21130104/Sebi-raises-concerns-about-MF.html?h=A1

Underperforming mutual funds under Sebi lens

The Securities and Exchange Board of India has said that it will question top officials of fund houses about non-performance of mutual fund schemes and probe their non-compliance with the stated investment objectives.

Concerned over non-performance of some schemes over a long period of time, Sebi Chairman, U K Sinha, said that fund houses need to look into the matter and consider the merger of some schemes.

Speaking at a CII mutual fund summit here, Sinha said that the regulator would also conduct inspection on AMCs (Asset Management Companies) for not following rules with regard to the fund objectives.

Every mutual fund scheme has a stated investment objective and they are supposed to invest accordingly.

Sinha said that the capital market regulator is considering questioning CEOs and fund managers of mutual fund schemes, which are not performing over a long-term basis since inception.

“Management (of mutual funds) should look into the areas of no-performance,” he said, adding that he is in favour of merger of schemes on case to case basis.

Pension schemes
He also said that nothing prevents fund houses to come up with pension schemes, but the issue of taxation needs to be solved.

“We are in touch with tax authorities and have sought similar treatment with the pension products,” he added.

Participatory Notes
About the recent flight of capital invested through P-Notes (Participatory Notes that allow rich foreign investors to invest indirectly through India-registered FIIs), the Sebi Chairman said that P-Notes have come down in the last few months and the Government and SEBI are encouraging QFI investment into the country.

QFI route
The Government recently came up with guidelines for encouraging overseas inflows through Qualified Financial Investment (QFI) route, which provides easier and more cost-effective compliance mechanism for foreign investors.

Sinha also said Sebi would soon come up with IPO guidelines regarding the safety margins, but did not give any timeline.

Source: http://business-standard.com/india/news/underperforming-mutual-funds-under-sebi-lens-/175605/on