The Securities and Exchange Board of India (SEBI) sent a letter to the Association of Mutual Funds of India (AMFI) pointing out 23 irregularities committed by mutual funds in FY 16-17. These lapses were detected as part of a routine inspection.

Key issues pointed out by SEBI included providing incorrect data on investor complaints in the annual report/MF website, failure to liquidate the equity portfolio in close ended schemes on maturity and highlighting the performance of only select schemes to the AMC Board and Trustees.

Several lapses also pertained to distributors and mis-selling of mutual funds. SEBI said that the AMCs failed to detect distributors splitting investments in order to enhance transaction charges. The regulator further said that mutual funds failed to ensure that the direct plan has a lower ratio than the regular plan of a mutual fund and the difference is to the extent of commission paid to distributors. The funds also continued to accept business from distributors who were suspended by AMFI.

With respect to debt schemes, SEBI noted instances were interest accrued but not paid was not included by funds while calculating whether there was any breach of regulatory limits for exposures. For instance, SEBI imposes limits with respect to exposure to paper issued by a single issuer or single group. It also pointed to failures in reporting Over-the-Counter (OTC) debt trades within 15 mins of the time of execution of the trades by dealers.

AMCs typically earmark certain amounts for investor education. According to SEBI, there were instances when this amount was incorrectly utilized for programs for financial advisors and for printing notebooks, planners and calendars without adequate records.

In respect of New Fund Offers (NFOs), the funds moved money into them from existing schemes and returned the money to the said schemes in case of failure of the NFO, in contravention of SEBI rules.

The regulator added that the 23 lapses were not exhaustive and merely indicative of the findings observed by it. It asked mutual funds to take corrective actions. It added that any repetition of the violations or non-compliance of its rules would be viewed extremely seriously but did not detail any potential penal consequences.

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