Sebi must relax some MF laws

Investors should be grateful to the Securities and Exchange Board of India for introducing several stringent regulations designed to protect against scamsters. But I believe that some of these measures should now be relaxed.

Take a look at some measures that are in force:

1) All mutual funds are required to send annual reports to unit holders. In addition the profit and loss account and the balance sheet must be published in two English papers and two vernacular papers. These inserts often cost several lakhs.

How many readers really study the figures? Those who are really interested could download the information from the fund's website.

2) MFs are obliged to have a board of trustees and a board of the asset management company. In my opinion, there is really no need to have two separate boards.

In any case most of the decisions are taken on a day-to-day basis, and therefore, there is no need for two separate boards to ratify them.

The AMCs are incorporated and governed under the Companies Act, 1956. Under Section 285, a meeting of the board of directors must be held at least once in every three months.

Third Schedule Clause 20 of the SEBI (Mutual Funds) Regulations requires a meeting of the trustees to be held at least once in two months.

This mismatch has not resulted from an act of omission. Prior to its amendment in 2002, the said Clause 20 provided for one meeting every three months.

Most of the items of business are first placed before the board of directors and their recommendations are then placed before the board of trustees. Therefore, it naturally follows that unless there is a meeting of the board of directors a meeting of the board of trustees cannot be held.

3) Under Regulation 29(4) of SEBI (Mutual Funds) Regulations, 1996, a MF must give a memorandum containing information as specified by SEBI along with the application form for units.

It is open to a MF to provide either an abridged offer document or a detailed offer document along with the application for units. There is not much difference between the said documents and, therefore, the application form.

Since each MF scheme is separate and distinct from other schemes, it may not be relevant for investors to know the performance of other classes of schemes floated by the MF.

At best, an offer document pertaining to a debt scheme may disclose performance of the other debt or income schemes of the same MF.

As experience has shown, certain MFs have done well in debt funds/equity funds/balanced funds, as the case may be and investors are largely aware of the relative strengths and weaknesses of the MFs.

The offer document now in vogue needs a thorough overhaul in the light of the experience gained over the years so that it is presented in a simplified form.

4) Recently, SEBI has substituted Regulation 65 of SEBI (Mutual Funds) Regulations, 1996.

Regulation 65(1) prior to its substitution read as under:

"Communications of findings, etc.: The Board shall, after consideration of the inspection report or investigation report referred to in regulation 64, communicate the findings of the inspecting officer to the mutual fund, trustees or asset management company as the case may be, and give him an opportunity of being heard.

Provided that if any proceedings under Chapter VIII are initiated the procedure under Chapter VIII shall be followed.

On receipt of the reply if any, from the mutual fund, trustees or asset management company, as the case may be, the Board may call upon the trustees or asset management company to take such measures as the Board may deem fit in the interest of the investors, securities market and for due compliance with the provisions of these regulations."

The new Regulation 65 reads as under:

"Action on inspection or investigation report: The Board or the Chairman shall after consideration of inspection or investigation report take such action as the Board or Chairman may deem fit and appropriate including action under the Securities and Exchange Board of India (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations 2002."

As can be seen from the above, the earlier Regulation 65 provided for communication of the findings of the inspection report to the MF/AMC/Trustees and giving them an opportunity of being heard.

The new Regulation 65 empowers SEBI or its chairman to initiate appropriate action including penalty based on the inspection report.

The newly inserted Regulation 65 does not give any opportunity of being heard, which goes against the principal of natural justice.

5) Some of the equity-linked tax saving schemes are listed on the stock exchanges. This was done as per the notification issued by the Central Government.

The units of the said schemes have not been dematerialised and are held in physical form. The Schemes offer NAV-linked repurchase facility also and are thinly traded on the stock exchanges.

The listing of these schemes, in our view, has not served any useful purpose to the investors.

Sebi may consider granting general exemption to MF schemes, which are listed on the stock exchanges from certain compliances, which are mandatory for listed companies. This will do away with the need to seek specific exemption every time there is an amendment to the listing agreement.

6) By amendment to SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997, MFs have been covered as a person acting in concert requiring them to comply with the takeover regulations.

It may be pointed out that the objective of MFs is to raise money from the public and invest it as per the terms of issue.

By appropriate amendment to SEBI (Mutual Funds) Regulations, MFs can be prevented from participating in takeover bids.

This will do away with the need for MFs to comply with the requirements of takeover regulations.

7) Finally, the mountain of information required to be submitted to Sebi by each and every MF makes one wonder whether anyone there has the time and energy to browse through, leave alone study it. Even if this is carried out with due diligence, does it serve any purpose?

During the best of times, minimising costs is an extremely vital method of enhancing returns for MFs. This becomes all the more critical in the current plummeting interest rate environment.

The above measures would go a long way in reducing the cost of administration of MFs in general, thereby directly benefiting investors.

Yes, there was a time when clamping of regulations was a necessary evil. However, all such measures have to be reviewed from time to time to judge their efficacy and relevance. Such a review, I am afraid, is long overdue.

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