Finance News

Sebi told to look into conflict of interest in MFs

The ministry of corporate affairs has asked the capital markets regulator Securities and Exchange Board of India (Sebi) to check whether there are any problems in the manner the mutual fund industry functions in the country, as claimed by an expert.

A mutual fund is structured in three parts: An asset management company (AMC) which actually does the investments, a sponsor company which makes the initial investments to set up the AMC and a trustee company which is expected to monitor the AMC's investments on behalf of the unit holders.

A self-proclaimed fund industry expert Vijay Gokhale has written to the ministry and SEBI arguing that many AMCs carry out practically all activities pertaining to the fund on behalf of the trustees and the AMC is virtually the face and mouthpiece of the fund. Pointing out that there should be an arm's length relationship between the trustee company and the AMC, Gokhale has stressed this is not the case in many mutual funds.

He said many trustees do not have an independent place of business or staff of their own. "It is impossible to visualise as to how do the trustees discharge various responsibilities without their own staff. It is feared that conflicts of interest occur in this informal arrangement creating great potential for abuse. This has been going on for years," his communiqué was quoted by news agency Press Trust of India.

He said many trustee companies perform their supervisory functions based on information provided by the AMC and sometimes even the reports submitted by trustees to SEBI are prepared by AMCs. The ministry of Corporate Affairs has asked the regulator to examine Gokhale's assertions at the earliest.

But Dhirendra Kumar, head of mutual fund tracking firm Value Research, doesn't agree with Gokhale.

Speaking to FE , Kumar said, "The mutual fund industry is structured as per SEBI rules and there is nothing substantial in the complaint. The summary of operation is released every month and that takes care of everything. That the ministry is asking SEBI to examine the matter, maybe nothing more than a routine 'forwarding' of a letter."

A P Kurian, Chairman of Association of Mutual Funds of India (AMFI), also said there is no conflict of interest occurring in the industry. According to the latest figures released by the association, the total assets under management is to the tune of Rs 5,56,103.17 crore as of June 30, 2008.