A reform continuum

A reform continuum

Regulators are notorious the world over for being behind the curve when it comes to policing. A sudden slew of changes are usually the result of either a scam in an industry or political pressure. Reforms initiated by the Securities and Exchange Board of India (Sebi) in Indian mutual funds reported in the last 12 months seem to be an exception. There is no scam in the industry and there is no political pressure on the regulator to show performance. We must view these changes in the context of a fallout of the 2008 crisis when the short-term debt market froze, and efficient housekeeping aimed at getting regulation abreast of market events, growth of the industry and detection of process errors.

This newspaper sees the changes in the past 18 months as part of an ongoing process to tweak the fairly robust Mutual Fund Regulations of 1996. The changes are in two key areas. The first set looks at making it less profitable for fund houses to service the corporate sector. With a bulk of the assets coming from non-retail sources, Sebi had been nudging mutual funds towards reducing their corporate focus and looking after the investor category they were supposed to—the retail investor. The biggest change will kick in from 1 July when short-term debt securities will be valued on a mark-to-market basis and not by the current straight-line method. Most retail investors will remain unaffected, but this will make the parking of short-term money by corporations less predictable and more volatile. While the industry gets used to this, the next part of reform is already on the agenda— to get funds to stop massaging their net asset value number by managing the cost figure.

The second set of reforms looks at investor protection. Protection of the investor tops the list of three objectives of a securities market regulator as mandated by the International Organization of Securities Commissions, the representative body of the world’s securities market regulators. Retail investors need protection in two areas: one, from badly constructed products; two, from being sold the wrong product, even if it is well constructed. While product construction in the Indian fund industry is good, the other area is still wide open for reform. The proposal to construct sale-side guidelines that include basics such as profiling consumers and matching consumers to suitable products are a step in the right direction. This paper would like to see the “right-selling" guidelines being extended by the ministry of finance to the entire retail financial sector.

How will the ongoing reforms affect the mutual funds industry? Tell us at views@livemint.com