In the wake of mutual funds' ill-fated investments in companies like DHFL, capital markets regulator Sebi's whole-time member G Mahalingam on Thursday asked the industry not to mis-sell credit funds to investors by assuring higher returns and disclose the "hidden risks". He also exhorted the industry to manage liquidity such as to take care of any stressful times, calling out the watchdog's attempts to mandate overnight funds to hold liquidity buffers as an effort towards the same.
Mahalingam, a career central banker who joined Sebi, also went public with his disappointment at lack of interest among the mutual funds when it comes to voting on resolutions put forth by listed companies and specifically mentioned scams like Crompton Greaves, Fortis and Religare in the same context.
In the comments that come in the light of drastic erosion in value of investments on bets on DHFL following the IL&FS crisis, Mahalingam acknowledged that we have gone through "stressful times" and urged caution while selling products so that the retail investors' faith isn't dented.
"The industry needs to ask a question to itself, how do I sell the credit funds? How do I market it to consumers? Do you market it saying it will fetch you 50 bps extra, or do you also tell him that there is a risk which is inherent and hidden there? I think it is the duty of the industry and the distributors to bring clearly this risk into perspective so that the retail investor does take a calculated call," Mahalingam said, addressing a summit organised by lobby grouping CII.
"We don't want to deal with complaints later that I was told that I will get a return of 10-11 per cent return. While you talk about the return, you got to talk about the probable risk which is lying hidden on the horizon," he said.
"Credit funds will have to do a much more responsible sales job in times to come."
Meanwhile, on the need for liquidity in times or stress, he said the Sebi has nudged the industry through certain measures which are in line with the banking industry's cash reserve ratio or statutory liquidity ratio.
Industry players should be “able to gauge what is going to be the liquidity demands in a stress scenario, and it (industry) is able to build up the liquidity buffer by building up a ladder of liquidity maturities", he said.
He acknowledged that maintaining such liquidity buffers may lead to a dent in profits for the industry because of crimping margins, but underlined that the industry ought to do it for its long term sustainability.
Earlier in his speech, Mahalingam also spoke out against an "obsession" within the industry to deliver what is called as alpha or higher return to investors, and advocated for a tempering in the same in favour of sustainability.
Mentioning instances like those in the case of Crompton Greaves, Religare and Fortis, where the companies were came out wanting on liquidity corporate governance, he said the industry needs to be forthright on the "stewardship code" and vote on resolutions.
At present, MF players' abstention rate on resolutions put to vote stands at 12 per cent, he said, adding that the same needs to be brought down to under 2 per cent in three years.
Later, he clarified that industry players do vote on proposals and the rate of abstaining used to be over 50 per cent at some point of time.
The MF investors are much more educated and knowledgable than the normal investors and hence should play a proactive role to ensure corporate governance standards are met at companies.
He, however, said that Sebi has not done an analysis on the reasons which make MF players take a call on abstaining from voting.
At present, the MF industry's assets under management of Rs 27 trillion is only a fourth of the bank deposits, and despite the reverses of the last 18 months following the IL&FS episode, there is no reason why it should not touch 50 per cent, he said.
Stating that there are only 3 crore accounts at present, he urged the players to go beyond the top cities to peddle the products.