SEBI proposed tightening responsibilities of mutual funds trustees

What’s in today’s article?

• Why in news?
• What is Securities and Exchange Board of India (SEBI)? 
• What are the powers of SEBI?
• News Summary: SEBI proposed tightening responsibilities of mutual funds trustees
• What is the role of Trustees?
• What has SEBI proposed?
• Why this tightening of responsibilities of trustees now?
• How will it benefit unit holders?

 

Why in news?

• The capital markets regulator Securities and Exchange Board of India (SEBI) recently proposed to review the role and accountability of trustees of mutual funds.
  • A mutual fund is a company that pools money from many investors and invests the money in securities such as stocks, bonds, and short-term debt.
• It has also put forward some recommendations to enhance the accountability of the board of asset management companies (AMC).

 

What is Securities and Exchange Board of India (SEBI)? 

• SEBI is a statutory regulatory body established on the 12th of April, 1992.
  • It was established in accordance with the provisions of the Securities and Exchange Board of India Act, 1992. 
• It monitors and regulates the Indian capital and securities market while ensuring to protect the interests of the investors, formulating regulations and guidelines.

• SEBI is run by a board of directors, whose members include:
  • the chairman nominated by the Union Government
  • two officers from the Ministry of Finance, 
  • one member from the Reserve Bank of India, and five members who are also nominated by Union Government

 

What are the powers of SEBI?

• Quasi-Judicial 
  • SEBI has the authority to deliver judgements related to fraud and other unethical practices in terms of the securities market.
• Quasi-Executive
  • SEBI is empowered to implement the regulations and judgements made and to take legal action against the violators. 
  • It is also authorised to inspect Books of accounts and other documents if it comes across any violation of the regulations.
• Quasi-Legislative 
  • SEBI reserves the right to frame rules and regulations to protect the interests of the investors. 
  • Some of its regulations consist of insider trading regulations, listing obligations, and disclosure requirements. 
  • Despite the powers, the results of SEBI’s functions still have to go through the Securities Appellate Tribunal and the Supreme Court of India.

 

News Summary: SEBI proposed tightening responsibilities of mutual funds trustees

 

What is the role of Trustees?

Image caption: Trustees in the mutual fund structure

• Mutual funds in India have a three-tiered structure – mutual fund, the trustees and the AMC. 
• Board of trustees or trustee company holds the property of the mutual fund in trust for the benefit of the unit holders.
  • Hence, the trustee is the custodian of the trust of millions of mutual fund investors. Therefore, their responsibility is a fiduciary responsibility.
• The trustees ensure that the funds are actually managed in the interests of the shareholders. 
  • While the trustees will not get into the day-to-day management of the funds, they will set broad guidelines and compliance check points.
• They appoint an AMC to float schemes for the mutual fund and manage the funds mobilised under various schemes.
• They are also expected to exercise supervisory oversight over AMC and its activities so as to ensure that AMC acts in the interest of the unitholders.

 

What has SEBI proposed?

• Increased accountability of trustees
  • Sebi has recommended that the trustees will be responsible for taking steps so that there are system-level checks in place to prevent fraudulent transactions. 
  • To ensure that they focus on their core responsibilities, Sebi has proposed that the trustees should take help of audit, legal firms and merchant bankers for carrying out due diligence on their behalf.
• Regulation of AMC
  • It has also recommended amending certain regulations for AMC and also include additional clauses to enhance the role, responsibility and accountability of the board of AMC.
  • SEBI also proposed the constitution of a ‘Unit Holder Protection Committee’ (UHPC) by board of AMC. 
    • This will help in an independent review mechanism for the decisions of AMC from the perspective of the unit holders’ interest, across all products and services.
• To strengthen governance and for financial independence
  • For this, SEBI suggested that all the existing trustees with board of trustees structure should convert into a trustee company in the next one year.

 

Why this tightening of responsibilities of trustees now?

• According to SEBI, though mutual fund regulations provide for some restrictions to address few conflicts of interest, there are some areas where the Trustees need to pay attention.
• These areas include:
  • investment by mutual fund (MF) schemes in public issues of its sponsor, its associates and/or group companies; 
  • investment by MF schemes for fund raising activates by such companies where its sponsor, associates or group companies are appointed as merchant banker; 
  • sponsor influencing voting by MF schemes in companies in which it has interest and MF availing services of its sponsor, associates and group companies at terms which are not at arm’s length.

 

How will it benefit unit holders?

• Once finalised, the trustees will ensure that the AMCs act in a manner which is not skewed in favour of AMC’s stakeholders.
• The key areas of their focus will be fairness of fees and expenses charged by the AMC and misconduct including market abuse / misuse of information by the AMC or AMC employees or distributors. 
• The trustees will ensure that there is no mis-selling of mutual fund schemes to increase asset under management (AUM) and valuation of the AMC.

 

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Q1) What are Mutual Funds?

A mutual fund is a pool of money managed by a professional Fund Manager. It is a trust that collects money from a number of investors who share a common investment objective and invests the same in equities, bonds, money market instruments and/or other securities.

 

Q2) Who is custodian and trustee in mutual fund? 

The trustees of the mutual fund hold its property for the benefit of the unitholders. Asset Management Company (AMC) approved by SEBI manages the funds by making investments in various types of securities. Custodian, who is registered with SEBI, holds the securities of various schemes of the fund in its custody.

 

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Source: Why has SEBI proposed tightening responsibilities of mutual funds trustees?  |  SEBI  |  The Economic Times