SEBI to examine conflict of interest among AMCs, MFs and trustees

Mumbai: The ministry of corporate affairs has asked market regulator Securities and Exchange Board of India (SEBI) to examine the issue of a `conflict of interest' among sponsors of mutual funds (MFs), trustee companies and asset management companies (AMCs).

Following a representation made by mutual fund industry expert Vijay Gokhale, the ministry wrote to SEBI, asking the regulator to examine the matter at the earliest.

Gokhale also made a representation to SEBI, in which he said the AMCs practically carry out all activities pertaining to the fund on behalf of the trustees and the AMC is virtually the face and mouthpiece of the fund.

While there should be an 'arms length' relationship between a trustee company and the AMC, that is not the case in many mutual funds, he pointed out, adding that many trustee companies 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 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," Gokhale's said in his letter to SEBI.

This is of particular concern because the trustees are expected to be the first level of regulators to safeguard the interest of mutual fund investors, he observed.

Gokhale said many trustee companies carry their supervisory functions based on information provided by the AMC itself and sometimes even the reports submitted by trustees to SEBI are prepared by the AMCs.

Ideally, an AMC should be an independent company and try to compete for business from a mutual fund and trustees should choose an AMC on merit, he said.

What has enabled this is the inadequate trading in many debt securities. For years, regulators have been dragging their feet on listing of corporate papers and PTCs, and are yet to take any initiative to allow interest rate futures, which would have partly helped MFs and other bond players to hedge the risks. 
 
Association of Mutual Funds of India (AMFI) chairman A P Kurian, however, said there is no conflict of interest and trustee companies need not necessarily have independent staff or office space.