MFS in a bind over meeting Sebi diktat

An innocuous looking regulatory diktat from the Securities and Exchange Board of India (Sebi) aimed at making life easier for mutual fund trustees has put the industry in a spot.

The circular, issued on August 10, mandates trustees to appoint a dedicated officer by October 1 to assist them in their work. Apart from the lack of clarity on the role this person would play, industry players reckon it will be near impossible to meet the deadline.

Some trustees fear the appointment could increase their liability in monitoring the asset management companies (AMCS) substantially.

Over the past few days, trustees and top AMC officials have tried to thrash out a solution. Industry body Association of Mutual Funds in India (Amfi) has written to the regulator explaining the predicament even as trustees are individually reaching out, seeking clarity.

At a recent meeting between the trustees and the top brass of a large AMC, for instance, there was a debate on whether a former Sebi official would be more suited for the role or an outsider with experience in the capital market space.

“Should the officer be a person who understands investments or someone who understands compliance, operations or audit? These are all very different skill sets,” said a senior AMC official. “It will not be easy for 40-odd AMCS to recruit a senior person with relevant experience from the market. Ninety per cent of AMCS may end up deputing a person from the AMC for the role, mostly from the compliance or internal audit departments. The smaller AMCS, however, may not have enough senior personnel to choose from,” added another senior official.

Amfi told Sebi that the appointment should be left to trustees rather than being made mandatory. The industry body has asked the regulator to push the deadline to April 1 as screening applications, shortlisting and recruiting candidates and determining the officer’s work might take time.

Further, instead of “recruiting”, Amfi wants Sebi to allow the officer to be posted on deputation with direct reporting to the trustees.

This officer, it said, should be allowed to be an employee of the AMC or any associate or group company of the AMC, trustee or sponsor. The other option could be to hire the officer from an external agency as a consultant or use the officer’s services contractually.

“If the dedicated officer has to be recruited by the trustees as an employee under an employment contract, the trustees shall become liable to fulfill all the statutory obligations under various employment related laws such as employee’s provident fund, insurance, gratuity… resulting in avoidable compliance burden on trustees, which could be operationally challenging. Further, wherever the legal structure of the trustees is in the form of Board of Trustees, there would not be a legal entity (trustee company) wherein the incumbent officer could be employed,” Amfi told Sebi a few days ago.

“Should this officer be totally independent from the AMC? Why will someone from the AMC join the trustee company when s/he is better compensated by the AMC? What about the long-term career prospects of the officer? Will he be held responsible if something goes wrong within the AMC?” asked the second senior official quoted above.

Trustees’ main role is to ensure the interest of unit holders is protected and the AMC complies with all regulations. In the past, a few trustees had reached out to Sebi saying they had not got active cooperation from AMCS or that they did not have administrative support to discharge their duties. The August 10 diktat to appoint an officer seeks to address this.

Sebi has been nudging trustees and AMC sponsors to play a more active role in managing risks since 2017.