The Securities and Exchange Board of India (SEBI) has asked trustees of asset management companies (AMCs) to ensure fairness of the fees and expenses charged to the unitholders. Trustees would also be required to review the performance of AMCs in their schemes versus performance of peers or the benchmarks.
To address conflicts between the interests of unitholders and those of stakeholders in asset management companies (AMCs), the capital markets regulator has come out with the roles and responsibilities of trustees and board of directors of Asset Management Companies (AMCs) of Mutual Funds.
This circular would come into force with effect from January 1, 2024.
As per the regulatory framework of SEBI, the Trustees hold the property of the mutual fund in trust for the benefit of the unitholders and their primary role is to ensure that AMCs appointed by them act in the best interests of the unitholders.
Accordingly, any conflict between the interests of the unitholder and that of AMCs’ stakeholders needs to be addressed by the Trustees.
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While MF regulations provide guidelines to address conflicts of interest, there remained some areas that required Trustees to pay specific attention to. The latest circular is aimed at filling those gaps.
Core responsibilities
As per the SEBI circular dated July 7, the Trustees’ core responsibility would be to ensure that the AMCs have put in place adequate systems to prevent miss-selling to increase assets under their management and valuation of the AMCs.
“The Trustees shall ensure that operations of AMCs are not unduly influenced by the AMCs Sponsor, its associates and other stakeholders of AMCs. Also, the Trustees shall ensure that undue or unfair advantage is not given by AMCs to any of their associates/group entities,” the circular noted.
Further, the Trustees would also be responsible to address conflicts of interest, if any, between the shareholders/stakeholders/associates of the AMCs and unitholders.
To prevent fraudulent transactions including front running by employees, form splitting/ miss-selling by distributors etc, the Trustees would be required to take steps to ensure that there are system-level checks in place at AMCs’ end.
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In order to enable Trustees to focus on the core responsibilities, for responsibilities other than the core responsibilities, they may rely on professional firms such as Audit Firms, Legal Firms, Merchant Bankers, etc (collectively referred to as “third party fiduciaries”) for carrying out due diligence on behalf of the Trustees.
Unitholder protection committee
In order to have an independent review mechanism for the decisions of AMC from the perspective of the unitholders' interest across all products and services, Sebi had earlier mandated that a "Unit Holder Protection Committee (UHPC) should be constituted by the board of AMC".
A UHPC would be responsible for the protection of the interest of unitholders vis-a-vis all products and services provided by the AMC.
The committee would also ensure the adoption of sound and healthy market practices in terms of investments, sales, marketing, advertisement, management of conflict of interests, redressal of unit holder’s grievances, and investor awareness.
In terms of the constitution of UHPC, the Chairperson of the Committee needs to be an independent director, while the committee will have a minimum of three directors as members.
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As one of its responsibilities, the committee would review measures taken for ensuring timely receipt of dividend and redemption proceeds, annual reports, and other regulatory communications/disclosures.
Over the past decade, there has been a fivefold increase in the size of the mutual fund industry. The industry’s AUM grew from Rs 7.93 trillion on November 30, 2012, to Rs 10 trillion in May 2014 and in the span of about three years, it crossed Rs 20 trillion in August 2017.
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The size of the industry’s AUM crossed Rs 30 trillion in November 2020 and, recently in November 2022, it surged past the Rs 40-trillion mark.
Industry insiders believe that the heightened scrutiny may be a fallout of alleged misconduct at some of the industry’s top fund mutual fund houses.
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