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Sebi picks holes in MFs' trade books

Janaki Krishnan & Rakesh P Sharma

The Securities and Exchange Board of India's ongoing inspection of mutual funds' accounts has revealed that records of transactions justifying investment decisions are not being maintained properly by many funds.

Around two years back, Sebi had issued a circular stating fund managers should keep records of their transactions so that in the future if any of their decisions were called into question then they could refer to the records which would have all the details.

According to industry insiders, last year's inspections by Sebi revealed that the records were extremely sketchy and shoddy. However since it was only a year since the circular had been issued Sebi just contented itself by commenting on it and did not really pull up funds for it.

This year, however, Sebi's comments have been more harsh and in case of some funds it has said the transactions records do not really give a clear reason for the investments made.

"Sebi is still being very nice about it," said the head of a foreign mutual fund, whose inspection has just been completed. "Next year we expect they will make us accountable for it,' he said, adding that Sebi was just gradually tightening its screws on the sector.

The whole idea of introducing the practice of keeping transactions details was done not only for the purposes of records but also to inculcate a sense of responsibility among fund managers.

"The moment a fund manager knows that his transactions have to be recorded he will be more careful about his investment decisions," a mutual fund head said, pointing out that if Unit Trust of India and other funds had followed this practice earlier then the losses arising from investments in Cyberspace would never have occurred.

Incidentally, last year when Sebi had investigated into price manipulations in certain scrips, especially those of software companies, mutual funds were also hauled up for taking investment decisions which in hindsight were revealed to be unwise.

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