Sebi to lay down rule to check mis-selling of MFs

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Securities and Exchange Board of India (Sebi) has said that the mis-selling rampant of mutual funds by institutions require a systemic approach.

In an interview to CNBC-TV18 Sebi, Executive Director, KN Vaidyanathan said that rules should be laid down to define mis-selling of mutual funds.
 
Sebi is planning to conduct due diligence for the process and built institutional mechanism to prevent mis-selling. He said that the enforcement of the norm will follow once the law is clearly chalked out.
 
According to him, there should be subsequent punishment for playing truants.

He added that banks and distributors have higher cost of raising money and higher churn ratio. The retail component of mutual fund industry is at Rs 3 lakh crore.

Here is a verbatim transcript of the exclusive interview with KN Vaidyanathan on CNBC-TV18. Also watch the accompanying video.

Q: There has never been an order passed by SEBI, which hauls up somebody for mis-selling. What is that?

A: I think the framework is evolving. You can't haul up somebody unless you have set out the rules of the game. It is important to recognize that if I am going to catch you for some violation, I should have first laid down the rule, which will help decide that as a violation. So our attempt here is the process of setting what are right-selling guidelines is to establish the rules of the game, as to what are right selling guidelines and anybody who deviates from that is treading into mis-selling.

So this is an evolving process. I think in secondary market, a fair amount of progress has been achieved; we are trying to do the same in the realms of mutual funds by an attempt to define what is right selling and how is it different from mis-selling.

Q: When we talk of foreign institutional investors (FIIs), whether we talk of mutual funds, whether we talk of brokers, exchanges, the kind of regulations that we have in place are world-class and they have been enforced through thousands of orders that have been passed. Why it is that something as critical as this, which touches directly an investor in this country, has been allowed or has escaped attention for 15 years?

A: I do not think it's proper to say it has escaped attention because putting down framework for encouraging right practices in selling is a combination of several things. The mutual fund, for example, hitherto we were looking association of mutual funds that's Association of Mutual Funds of India (AMFI), which was given power by Securities and Exchange Board of India (SEBI) to register the distributors of mutual funds and to oversee their activities. AMFI has been doing that for about ten years now, they put out a code of conduct.