Streamlining the Mutual Funds industry

The Securities Exchange Board of India
(SEBI) announced a garden-fresh ruling in relation to mutual funds placing a 10
percent cross-shareholding cap in mutual funds with the object of
sidestepping potential conflict of interest in the management of mutual funds
by asset management companies.

A mutual fund is a
professionally-managed investment scheme, usually run by an asset management
company that brings together a group of people and invests their money in
stocks, bonds and other securities.

The following are the key policy
changes in relation to mutual funds:

·       Promoters
of the UTI Asset Management Company (AMC) are required to reduce their
shareholding pattern by 10% in the next one year.

·       Any
shareholder owning 10% of shareholding in any AMC will be prohibited from
retaining 10% or more stake in another mutual fund house operating in the
country.

·       No
sponsor of a mutual fund, its associates, group-company and its AMC will be
authorized to hold 10% or more stake in a rival AMC.

·       Mutual
fund distributors are inculcated to craft the undertakings of ‘advising’ of
investment products and ‘selling’ of investment products separately to defy the
conflict of interest amid the advising activity and selling activity of
investment products.

·       Mutual
fund distributors are permitted to explain the features of the product to
client despite the distribution of the investment product.

·       Existing
registered investment advisers (offering distribution services through a
separate division) will be provided with an option to decide on amid providing
investment advice and distribution service by March 31, 2019.

·       It
is mandated that with effect from April 1, 2019, any person (including their
immediate relatives or holding or subsidiary or associate entity) will be
eligible to offer either investment advice or distribution services.

These rules are formulated with the
intent to sustenance with the provisions of Unit Trust of India Act (Act) and
not in conflict with the said Act and further to streamline the governance
structure of mutual funds.

It is hoped that with the serious
implementation of latest mutual funds rules will result in evading the conflict
of interest in certain mutual funds undertakings and enhance accountability and
transparency in governance structure of mutual funds.

Research and inputs by Paruchuri
Baswanth Mohan

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About the author :

Bhumesh Verma is a lawyer with over 2 decades of experience in advising domestic and international clients on corporate transactions (M&A, Venture Capital, Private Equity, Startups, corporate advisory, etc.) and features in “The A-List – India’s Top 100 Lawyers” by India Business Law Journal. He keeps writing frequently on FDI, M&A and other corporate matters and is a guest faculty as well. He can be reached at bhumesh.verma@corpcommlegal.com.