Explainer: Self-regulation for mutual funds

Securities and Exchange Board of India (Sebi) chairperson Madhabi Puri Buch last week said though the Indian mutual fund sector is considered safe, it needs an ethics committee to self -regulate and weed out individual bad actors. And if self-regulation is not effective, then Sebi will step in. Ashley Coutinho takes a look at what this means

What is the need for an ethics committee

Sebi chairperson Madhabi Puri Buch said the biggest risk to the growth of the MF industry is individual misdemeanour. This is the primary reason why she nudged the Association of Mutual Funds in India (Amfi), an industry body, to form an ethics committee in a meeting with industry honchos during the inauguration of Amfi’s new office. She said the industry was on a firm footing and had helped channelise savings into the financial market.

She also said it would be best for the industry to self-regulate itself rather than be pulled up by the regulator. “The only risk to the MF industry is individual conduct. When this reaches a high level, unfortunately, the regulator has no option but to come with a hammer,” she said.

Is Amfi a self-regulatory organisation?

Amfi, the industry association, is not a self-regulatory organisation (SRO). In 2013, Sebi’s decision to appoint a company floated by industry body Amfi as an SRO for distributors came to naught after the Financial Planning Supervisory Foundation, a private not-for-profit organisation, challenged the decision in the Securities Appellate Tribunal. The tribunal quashed Sebi’s decision.

Sebi appealed to the Supreme Court, which upheld the SAT order. Sebi, however, now wants Amfi to find a way to take action against individuals who are acting in a mala fide manner in the market and engaging in misdemeanours and become more vigilant to ensure that the law and ethical practices are followed and the bad apples are weeded out.

Bad apples

Sebi cracked the whip on Axis MF last year, when it was alerted that trades by certain entities between September 2021 and March 2022 were not executed in the normal course, amounting to front-running. In March this year, it barred 21 entities from dealing in the securities markets and directed them to disgorge `30.6 crore within 15 days, in the Axis MF case. Establishing links through a series of WhatsApp messages, the market watchdog identified Axis MF’s former chief dealer as ‘Jadugar’ who conceived a fraudulent scheme.

“…the way Viresh Joshi has conducted himself as a dealer of Axis MF in conceiving a fraudulent scheme and executing the said scheme so meticulously over a sustained period in collusion with other unscrupulous entities to front-run the trades of his very own mutual fund … smacks of rampant dishonesty and unfairness on the part of Viresh Joshi and his accomplices,” said the order.

Sebi measures to check wrongdoing at AMCs

Last month, Sebi issued a consultation paper in which it proposed that AMC chiefs and senior management personnel would be held responsible for AMC misconduct and misselling. It has asked AMCs to put in place a surveillance system to deter possible market abuse, fraudulent transactions and check instances of front running, insider trading, misselling of products and misuse of information by the AMC, its employees or distributors. The paper spoke of the need for regular review and updating of systems and procedures, the possibility of resource sharing among AMCs, and the implementation of a whistle-blower policy.

The mutual fund industry is growing fast

The industry’s AUM had crossed the milestone of `10 trillion for the first time in May 2014 and had increased more than two folds in three years to cross `20 trillion in August 2017. The AUM size crossed `30 trillion in November 2020. The industry AUM stood at `41.6 trillion on April 30, 2023.

The mutual fund industry has crossed a milestone of 10 crore folios during the month of May 2021. The total number of accounts, or folios, as on April 30, 2023 stood at 14.64 crore, while the number of folios under equity, hybrid and solution oriented schemes, wherein the maximum investment is from retail segment stood at about 11.69 crore.


Sebi floated

self-regulatory organisation proposAl

Axis MF case

21 entities barred from securities market

`30.6 crore

disgorgement ordered by Regulator in Axis MF case

`41.6 trn

Size of AUM of Indian

MF Insustry