Sebi plans fresh round of mutual fund reforms

The next set of reforms in the mutual funds industry is round the corner with the Securities and Exchange Board of India likely to lower the fund management charges and introduce stricter compliance standards.

The mutual funds advisory committee, which met on Friday, has recommended that asset management companies lower the fund management fee from the present level. Fund houses currently charge 1.25 per cent as asset management charges for the first Rs 100 crore (Rs 1 billion) garnered by a scheme, and 1 per cent thereafter.

The advisory committee, comprising industry representatives and investor bodies, has suggested that the fee should be lowered as the assets under management increase.

The recommendation comes just as the dust was settling over the ban on entry load and the revamp of the exit load structure. The ban on entry load from August has led to complaints from fund houses that can no longer pass on distribution costs to investors.

Friday's meeting was also attended by Sebi representatives, including chairman C B Bhave.

In addition, Sebi is looking at the role of mutual funds in maintaining high corporate governance standards in listed companies. The regulator is of the view that mutual funds are not utilising their rights in companies in which they invest.

Fund houses have been asked to question a company's governance at annual general meetings, take recourse to legal provisions by approaching the Company Law Board or the registrar of companies if they felt that the company was not acting in the interest of investors, sources present at Friday's meeting told Business Standard.

To protect the interests of those who invest in mutual fund schemes, the regulator is planning to introduce an amended version of the standard warning in advertisements. In recent months, the regulator has expressed dissatisfaction at the rapid-fire manner in which standard warnings were issued in television advertisements.

Sebi now wants mutual funds to convey that investors could lose their entire investment, though the wording is yet to be finalised, a source said.

Further, to prevent concentration risk, Sebi intends to revisit the norms that mandate the minimum number of investors and the proportion of their holdings, which, in mutual fund parlance, is referred to as the 20-25 rule.

The percentage that a single investor can hold could go down to 10 to 15 per cent and the minimum number of investors will be increased to 50, said a source who did not wish to be identified.

At present, Sebi rules require a mutual fund scheme to have a minimum of 20 investors, with a single investor not holding more than 25 per cent of the assets. The logic of changing the current norms was that redemptions by some of the large investors should not impact others.

Also, the net asset value calculation could undergo a change. At present, for unlisted non-convertible debentures, rating agency Crisil does a mark-to-market valuation. Now, another agency will be roped in. If the two valuations differ, the regulator plans to mandate an average of the two.