In a move to protect investors, the Securities and Exchange Board of India (Sebi) has said that among other offences, manipulation of net asset value (NAV) by mutual funds (MFs) or any other action by an asset management company that may result in a substantial loss to investors can no longer be settled via consent orders.
It was announced through a circular dated 25 May. The capital markets regulator said that the circular is effective immediately and all consent applications need to be refiled in a new format.
What are consent orders?
A consent order is like a settlement between two parties in case of conflict or an out of court settlement. Earlier, any matter related to an investor grievance or NAV inaccuracy in which you may have suffered losses from your MF could be settled if the asset manager paid a penalty, but there was no need to determine whether there was a violation. “If there was a problem highlighted by the regulator and both parties were willing to settle outside the court, Sebi could issue a consent order and say that the case is closed. This meant that the time frame to resolve an issue was low and it gave the organization a chance to present its case,” says Rajesh Krishnamoorthy, managing director, iFast Financial India.
Till now, the regulation was silent on matters such as NAV manipulation and hence consent order was seen as the route. “The consent route under the April 2007 circular was wider and included a number of issues, but now it looks like specific matters will be handled separately,” says Jimmy A. Patel, chief executive officer, Quantum Asset Management Pvt. Ltd.
In cases of NAV manipulation, issues can arise when securities in a scheme are not valued accurately. This is mainly a concern in case of fixed-income securities which are illiquid and a market price can’t be attributed. However, Sebi has already tackled this matter by issuing valuation guidelines for cases in which the market price of a thinly traded equity share is not available or an illiquid fixed-income security is not available. These guidelines are clearly defined in the MFs master circular issued by Sebi.
Moreover, the valuation procedure for illiquid fixed-income securities are more or less standard as they refer to a fixed matrix recommended by the Association of Mutual Funds of India, an industry body. Also front-running, akin to insider trading, which if held up as amounting to NAV manipulation may now no longer be settled via a consent order.
Other than that, cases in which investor grievances have not been resolved suitably can also no longer be tackled via consent orders.
However, guidelines are silent on how these matters will be resolved now. “While the new circular specifies that consent route is no longer the way to go for critical matters that are specifically excluded, it can be safe to presume that for the excluded matters provisions of Sebi Act, Securities Contracts (Regulation) Act and Depositories Act will prevail.” says Patel.
“For now it means that doors are shut for companies to move through a consent order for such issues,” adds Krishnamoorthy.
It is possible that the markets regulator may follow up this guideline with more on what the process should be if not through consent orders.