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SEBI planning a forensic audit of mutual funds after tightening the responsibilities of trustees in the sector.

The assets under administration in the mutual fund industry are growing astronomically, surpassing Rs 39.89 lakh crore last year. The growing sector of mutual funds drew the market regulator’s attention.

The Securities and Exchange Board of India SEBI has recommended raising the responsibility and accountability of the trustees to protect unitholders’ interests in light of the mutual fund industry’s expanding size.

Additionally, the regulator has recommended improving the board of an asset management company’s responsibility (AMC).

In light of the unfortunate events at Franklin Templeton India Mutual Fund and Axis Mutual Fund in the previous 2-3 years, the capital markets regulator SEBI is planning a forensic audit of all 44 mutual funds just one day after releasing a consultation paper for tightening the duties of mutual fund Trustees.

The audit is expected to focus primarily on the due diligence carried out by MFs with regard to investments in illiquid securities, management of various risks such as concentration, downgrades, early warning signals, and liquidity issues of the securities in the portfolio, as well as valuation practices and investment strategy of various schemes.

For redeeming their own investments from the troubled six debt schemes on the basis of “private and non-public knowledge,” senior Franklin Templeton MF executives and its asset management firm came under regulatory examination in 2020.

SEBI opened an investigation into the alleged front-running by two Axis MF fund managers last year. These fund managers-cum-traders of the fund house allegedly engaged in unethical trading practices by placing orders at a value significantly higher or lower than the going market price and receiving kickbacks from specific brokers.

The mutual fund business has increased five-fold over the past ten years, with assets under administration reaching 40 lakh crore in December from 8 lakh crore in November 2012.

Mutual funds’ AUM increased from 10 lakh crore in May 2014 to 20 lakh crore in August 2017 in just three years, and then it surpassed 30 lakh crore in November 2020.

Equity mutual fund inflows rise over 3-fold in Dec: AMFI | Business News,The Indian Express

For the growing scope of mutual funds, SEBI felt the need to tighten Mutual Fund trustees’ responsibilities.

In India’s financial services sector, mutual funds play an important role. They provide a variety of investment options to ordinary clients who want to put their money in low-cost index funds and professional management teams. Additionally, they provide institutional investors with a low-risk method of developing new products or enhancing the flexibility of current portfolios.

The mutual fund sector has grown tremendously in India during the last few years. The country’s expanding income and population increase are the main causes of this expansion. For those who are unable to work for themselves, mutual fund investments serve as a source of income. As a result, more people are deciding to put their money into mutual funds.

It has also increased the number of people who wish to invest in mutual funds but do not yet have adequate retirement savings or plans in place. This indicates that they require assistance with money management so they can begin creating an investment portfolio as soon as possible rather than waiting until later in life when they might not be able to afford it.

The mutual fund industry in India has experienced significant change over the past few years as a result of these two developments: first, it is now more feasible than ever for people from all social classes to invest their money through mutual funds, and second, more people are starting their investments earlier than ever before to take advantage of the higher returns that come with doing so.

SEBI To Initiate Forensic Audit Of All MFs, Their AMCs And Trustees

Because of this expanding scope, the Securities and Exchange Board of India (SEBI) plans to streamline the tasks of mutual fund trustees so they can handle operational obligations and perform fiduciary duties.

Sebi issued a request for public input on a series of suggestions it had developed in this regard. These revisions will evaluate the responsibilities of mutual fund trustees and Asset Management Companies (AMC).

According to SEBI’s consultation paper, the responsibility of Trustees in ensuring that AMCs operate in the best interests of unit-holders takes even greater significance in light of the mutual fund industry’s expanding scope and reach.

For the interest of unit holders, trustees hold the mutual fund’s assets in the trust. Trustees choose AMCs to launch schemes and administer money raised through various schemes. Trustees are expected to monitor their operations and guarantee that the AMC operates in the unitholders’ best interests.

Roles and duties of your board of trustees | LegalZoom

Trustees must make sure that when the MF makes investments or uses services, the sponsor of the AMC is not receiving an unfair advantage. Additionally, it should be illegal for sponsor group companies to engage in insider trading or front-running while having access to MF’s confidential information. Sebi has established rules in this regard.

According to the latest proposals put out by Sebi, trustees must make sure that the AMC charges reasonable fees and expenses, evaluate its performance against that of its competitors, and prevent sponsors from wielding undue influence. In addition to asking for feedback from the general public on these recommendations, it also enquired as to whether the Trustees should concentrate on any other particular area beside the aforementioned new duties.

Currently, the trustees principally rely on the AMCs to guarantee compliance with the relevant laws and check compliance with the requirements of the Sebi’s periodic reporting. The Trustees must independently assess the degree of compliance by AMC, according to new instructions from Sebi, and cannot not only rely on AMC’s filings. AMCs should give trustees analytical information to aid in their oversight.

Sebi suggested that to avoid undue concentration of business with any broker, the board of the asset management company should make sure that the asset management firm has been vigilant in hiring the brokers, monitoring securities transactions with brokers, and avoiding these activities.

According to Sebi, a sizable portion of folios do not include bank account information or do not include a bank account number with 15 or 16 digits. Trustees should frequently evaluate the actions taken by AMCs for the folios which do not contain all KYC attributes with bank details because these folios are susceptible to fraud.

Sebi provided a list of responsibilities trustees may assign to AMCs. Among these are making sure that all procedures are in place before the AMC launches any program and figuring out any income owed to the fund and any income collected by unit holders in the mutual fund.

edited and proofread by nikita sharma

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