Capital market regulator the Securities and Exchange Board of India (Sebi) will form a panel to examine conflict of interests in mutual funds (MFs) between different investor classes such as retail and wealthy, said a person familiar with the plan.
The panel will review a rule permitting MFs to offer advisory services and manage different investment products under different categories, the person said. Sebi is yet to announce the formation of the panel. The latest attempt to review MF operations is part of a regulatory attempt to address complaints that retail investors in some cases are given a raw deal. MFs, besides managing retail investors' investments, offer portfolio management services to rich clients and corporates. They also manage and advise offshore funds, pension funds, provident funds, venture capital funds, insurance funds and exchange research, creating conflict of interest.
These businesses provide income to MF houses at different rates. So, the prospects of higher income from corporates or wealthy individuals may make the asset management company (AMC) compromise the interests of retail investors. An AMC earns 1.75-2.5% as fees on its equity schemes, while in portfolio management services, it gets a share of the profit in addition to fund management fees.
"Possible conflict of interest is inherent and intrinsic to the asset management business," says a Sebi discussion paper. "These potential conflicts may manifest themselves in many forms, including front-running, insider trading and unfair treatment to select investors."
The regulator has been cleaning up the mutual fund business, which, despite a two-decade history, is concentrated in cities and is dependent on corporate and rich clients' money.
It did away with the entry loads and scrapped the commissions to intermediaries.
Last week, it penalised HDFC Mutual Fund dealer Nilesh Kapadia and others for front-running in a few shares and causing notional losses.
The committee will also deliberate whether AMCs should be granted registration as a separate intermediary, without linking their registration to a particular mutual fund.
Current rules allow AMCs to offer many services if key personnel, systems, back-office, bank and securities accounts are segregated activity-wise. The current regulations have created Chinese walls, verticals across products, says the discussion paper. But conflicts can't be resolved with separate divisions, it says. They arise not due to common people or common system, but due to conflicts at group and institutional levels. Also, many fund houses sell investment products in the name of celebrity fund managers, though they may not be involved in its management. Employees of different divisions reporting to one person also create conflict despite segregation. The committee will discuss if fair treatment, best execution and trade allocation can be ensured to all investors.
Of the 48 mutual funds, 31 offer portfolio management services, 12 have venture capital funds, five manage offshore funds. Many of the group companies of MFs are registered with Sebi as foreign institutional investors. Out of 74 India-dedicated foreign funds, 36 are managed by 22 Indian MF arms.
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