The Securities and Exchange Board of India (Sebi) has started interacting directly with mutual fund (MF) trustees in a bid to empower them and make them more aware of their responsibilities. Sebi, the capital market regulator, is engaging with trustees in two ways—by conducting workshops and by holding more personalized one-on-one meetings, or collegiums. Two workshops, one in September and one in January, have already been held so far, as well as a collegium on 4 February. Sebi aims to hold three workshops and six collegiums a year, and it wants trustees to stand up and be counted.
Bringing trustees to the forefront...
Sebi’s move to engage trustees appears to be well placed. Your money in an MF lies in a trust that is taken care of by trustees. According to Sebi’s MF regulations, there should be at least four trustees, and at least two-thirds of them must be independent of the asset management company (AMC) or the sponsor. They are in general industry veterans drawn from various spheres of society, such as an experienced banker, an eminent lawyer, an ex-judge, a renowned chartered account and so on. They have a fiduciary responsibility to take care of the investor’s money and ensure that fund managers are managing money within the law.
But the moot question remains: What is fiduciary responsibility really, and do trustees understand the importance of their role? While your MF trustee may have been a bank’s chairman or a Supreme Court judge in the past, s/he needs to have a decent understanding of how your fund manager manages the money and whether your fund manager is managing your money professionally. When Sebi issued an order to the country’s second largest fund house, HDFC Asset Management Co. Ltd, in June 2010 accusing one of its employees of malpractice (investors lost Rs 2.38 crore, as per the order’s findings), it asked the trustees to ensure that investors’ losses are made good and also to revamp the fund’s internal risk control systems—something that the trustees were meant to have monitored.
“It’s all about getting back to basics; about getting trustees to understand their fiduciary responsibility. Over the years, the asset management business has gone in several directions—building assets under management, launching new products, pampering distributors, bothering about their valuation and so on. It’s time we go back to basics,” says K.N. Vaidyanathan, executive director, Sebi. Vaidyanathan is in charge of the investment management department at Sebi.
…and empowering them
In September, Sebi held its first workshop for trustees at the Taj President Hotel, Mumbai, which was attended by 175 trustees and independent directors of AMCs. As these workshops are meant to better acquaint the trustees with the AMC lingo, Sebi calls industry experts to interact with the trustees. Each workshop will typically last for half a day and cover two topics. In the September workshop, the first session covered debt markets and understanding the nuances of a fund’s performance, the second session (held in January) spoke about derivatives and operational risks in an MF.
All the trustees to whom Mint Money spoke said they stand to gain from such workshops. Ahmedabad-based lawyer Dharmishta N. Raval, who is on the board of trustees of Pramerica Mutual Fund, recollects that so far Sebi has called for a trustees meeting roughly only twice ever since MF regulations were first formulated in 1996. She says: “While the Association of Mutual Funds of India is the trade body for MFs and lobbies for them, brokers also unite at times for a common cause. The trustees rarely got a chance to come together to share their experiences.”
Apart from workshops, Sebi will also hold collegiums where trustees would get a chance to talk to Sebi and air their views. Here’s where most of the trustees, we spoke to, felt they stood to gain more. For instance, Nilu P. Gidwani, a trustee on the board of trustees of HSBC MF is among many who feel there is a gap between what the regulators expect from trustees and what the trustees actually do. “Such collegiums give us a chance to align our views”, he adds.
Are the trustees up to it?
Although Sebi has given power to the trustees to question (for instance, trustees have the right to stop the fund house from launching a new scheme if they feel it mirrors an existing one), not all trustees feel empowered enough. And here’s where the divide between expectations are most apparent and on two counts:
How much is enough: Many trustees feel that one meeting every two months with the AMC is not enough to go through the voluminous compliance reports that Sebi mandates AMCs to put before trustees.
For instance, one of the reports that the AMC gives to trustees is a note of every time (in a span of every two months) an MF scheme invests more than Rs 5 crore in a single equity scrip and Rs 75 crore in a debt scrip. Trustees such as P.P. Vora of large fund houses—such as Reliance Capital Asset Management Ltd with assets under management of Rs 1.02 trillion across 22 equity, 11 debt, six hybrid and one gold scheme—say such reports “run into 100 pages”. The genuineness of inter-scheme transfers made to, some times, meet panic redemptions is also hard to ascertain, says Vora.
“Most of these regulations were drafted around 10 years back and certain areas need to be reviewed”, adds Raval. Too much of paperwork was one of the key issues that trustees brought up with Sebi at the collegium. Says Gidwani: “Trustees can’t be expected to read the entire offer document, for instance, every time they are filed. But we ascertain that the salient features are in place and rely on the compliance officer and the AMC’s internal systems.”
A trustee’s liability:If your fund house commits an act of fraud, are the trustees liable to make good the loss? Sebi’s instructions to HDFC AMC’s trustees to ensure that investors get back their lost money are still fresh in many trustees’ minds.
Though most AMCs have formed a separate trustee company with a fixed share capital (contributed by the sponsor) against just a board of trustees—and their personal property is more safe—guarded as against a situation where just a board of trustees is the norm, it doesn’t absolve the trustees of their “fiduciary responsibility”. S.S. Sodhi, former chief justice of the Allahabad high court and a trustee of Fidelity Mutual Fund, believes that though trustees are responsible for investors’ loss, it is unlikely their personal property can be confiscated, unless it is proved that “trustees personally enriched themselves by doing something wrong”.
Winds of change
Apart from making the AMC board more accountable in the future, Vaidyanathan suggests that trustees should divide areas of fund management that each of them is most qualified to judge. “One trustee can look into audit reports, another can look into corporate governance, a third can look into fund performance and so on,” he says. K.R. Ramamoorthy, a trustee on Fidelity MF, says: “The efficacy of trustees also depend on the fund house’s pedigree and the quality of information they provide to us.” Ramamoorthy has a point. One of the trustees we spoke to said, in a lighter vein: “In my AMC, even if a peon turns around and says he has noticed something fishy, fire alarms would ring and troops from the sponsor company would descend on the AMC’s premises. Performance be damned, but compliance should be clean they say.” The trustee did not want to be named.
Sebi’s move appears to send out a message. While it will set broad guidelines for the MF industry, it wants MF trustees to ensure that fund houses implement them.