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The mutual fund (MF) industry was struggling with more than 80% physical transactions in the beginning of the past decade. In a visionary move, the Association of Mutual Funds in India (Amfi) initiated MF Utility (MFU), a system to aggregate transactions and increase digital transactions, besides enabling a scalable tech solution to bring convenience to all stakeholders, including investors. A proposal was submitted to the Securities and Exchange Board of India (Sebi) in May 2012 detailing all the facilities that shall be offered to transactors (distributors and investors), which included consolidated account statement on demand, facility for digital transactions/service requests, centralized grievances mechanism and aspects to enhance customer and distributor experience in transacting with mutual funds. The MFU was defined in the proposal as “an enabling market infrastructure for MFs that is future-ready, scalable, cost-efficient, provides national and global reach and provides benefits to various stakeholders".

This was followed by various discussions and in June 2012, Sebi approved the proposal to implement the MFU as an industry initiative with AMCs being “equal shareholders" and owning the system. The MFU was also a non-profit oriented initiative.

There were many naysayers, but in January 2015, the MFU system was successfully launched. Over a period, it grew to be the largest player with an average of 10,000 crore- 15,000 crore being transacted every day. Many investors and distributors found value in using the MFU for their daily transactions.

The MFU was structured and infrastructurally set up in a way that it could accommodate all transactions in the industry since the objective, as per the proposal submitted to Sebi, was along those lines. The proposal explained a plan to connect with stock exchanges and depositories, too. A common account number (CAN) for investors was proposed . Standardization of processes/practices and interoperability across RTAs (registrar and transfer agents) for account-related information was a very big benefit drawn by distributors/advisers and investors alike. Effective use of the MFU would have reduced at least 30-50% of cost for the industry, which would have benefited the investors. But the focus of the industry was somewhere else.

Sebi’s 26 July circular came as a bolt from the blue. It includes almost all recommendations in the Amfi proposal to Sebi for the MFU. Asking RTAs to come up with a common platform will see efforts duplicated, costing time, effort and money. In common parlance, this would be reinventing the wheel. Twitter was abuzz with questions like why Sebi did not know about the MFU’s existence and whether Amfi had not informed the regulator about having already created this convenient platform. Industry stakeholders are in complete confusion. Sebi will do well to once again go through the proposal submitted by Amfi in May 2012, which is already in compliance with the Sebi circular dated 26 July.

Interestingly, Sebi has not addressed a very important risk that is existing in the MF industry—concentration risk. With a duopoly, the entire industry assets of about 35 trillion are put into two baskets. Ironically, the industry and Sebi always advise investors not to put all eggs in one or two baskets and diversification is very important. Why isn’t Sebi looking at this serious risk?

With this circular, Sebi has unwittingly enhanced the risk manifold for investors. If the regulator is seriously looking to scale the industry and achieve the target of 100 trillion in assets under management set by Amfi for themselves a couple of years ago, it assumes extreme importance that the regulator takes necessary steps to reduce the concentration risk that exists for everyone to see.

Waking up when it happens will not help. Already, we have seen a severe crisis in the industry just about a year ago. Another one on the infrastructure side can gravely imperil the industry.

Therefore, investors and other stakeholders would expect that Sebi shall not push to create parallel systems and duplicate efforts that may lead to a waste of investors’ money, but create aspects to ensure their investments in the mutual fund industry are completely safe from any operational crisis. To conclude, it is logical for Sebi and Amfi to strengthen the MFU to extend the convenience enjoyed by some investors to all investors by recognizing it as market infrastructure. A couple of years ago, Amfi had submitted a report by PricewaterhouseCoopers, which recommended that the MFU should be made a market infrastructure.

V. Ramesh is an independent director and former MD & CEO of MF Utilities, and former deputy CEO of Amfi.

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