SEBI nudges AMFI to form ethics committee to catch bad apples in time

To be sure AMFI is not yet a Self-Regulatory Organisation (SRO). Despite this, Buch added that the MF industry (through AMFI) must form a way “to take action on individuals who are doing wrong things in the market.”

The capital market regulator has nudged the Indian mutual fund sector to form an ethics committee as one the first steps needed on its journey to manage assets worth Rs 100 lakh crore, more than double the present size of Rs 40 lakh crore.

Madhabi Puri Buch, chairperson of the Securities and Exchange Board of India who spoke at the inauguration of the new office of the Association of Mutual Funds of India, was full of praise for the mutual fund sector. She spoke eloquently about how mutual funds were the chosen vehicle to encourage Indians to invest in the economy and participate in the country’s growth.

But to build a “superstructure on top of a solid foundation it has built over all these years,” Buch said it was important to keep a check on individual conduct. And here’s where she nudged AMFI to form an ethics committee.

“The only risk to the MF industry is individual conduct. When this reaches a high level, unfortunately, the regulator has no option but to come with a hammer,” she said.

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Explaining the importance of self-regulation, Buch said SEBI has taken steps – and will continue to do so – to liberalise the sector. In other words, she said it would be best if the MF sector did most of the regulation on its own, thereby negating the need for SEBI to come down with laws that affect the entire industry and not just the offenders.

Its decision to allow sponsor less fund houses and new types of sponsors, taken in March 2023 after rounds of consultation, was a step towards liberalisation, she reminded the mutual fund house chiefs in the audience.

To be sure, AMFI is not a self-regulatory organisation. Yet, Buch added that the mutual funds, through AMFI, must find a way “to take action on individuals who are doing wrong things in the market.”

Buch’s comments came just over a week after SEBI issued a consultation paper that proposes to set up internal mechanisms within fund houses to catch frauds such as front running and insider trading. At the minimum, SEBI said such a system should be able to catch front running, insider trading, mis-selling of products, and misuse of information by asset management companies (AMCs), their employees, distributors, and delays in execution of orders by brokers and dealers.

“So very often, bad apples are there. There have been many cases where such cases have come to light and people in the industry have known about it for long. It has been common knowledge all along,” Buch explained.

From AMFI 1.0 to AMFI 2.0, Buch said the association needs to become more vigilant to ensure that the law and ethics are followed.

“The MF industry is maturing and has added four crore investors. It carries the highest amount of liquidity and gives a window to all asset classes. Due to this, it is always good that there is more self-governance,” the chief of a fund house said, asking not to be identified. “AMFI has been doing this, but there is scope to do more, to identify the grey areas before they become large. At AMFI, we will look into this and deliberate over the next few weeks on how best we can take this forward.”