SEBI mulls expanding AMC businesses with safeguards

The Securities and Exchange Board of India (SEBI) said in its paper that it had received a representation from the Association of Mutual Funds in India (AMFI) and other industry participants saying that broad-based funds — at least 20 investors; and no single investor accounting for more than 25% of the corpus of the fund — were barriers to do business as they did not provide a level-playing field with non-broad based funds.

“In view of the same, it was decided to review and consider relaxing the broad basing requirement and permitting asset management companies (AMCs) to serve pooled non-broad based funds as well, subject to strong governance and regulatory controls that would address any concerns related to conflicts of interest situations,” SEBI said.

The regulator proposes that in case the two different services are to be conducted under the same company, they could be separated by “Chinese Walls” or through “operational segregation.”

The paper also delineated the conflicts that could arise, like diversion of resources from mutual funds to more exclusive investment management services. To solve this, SEBI proposed to introduce caps on the difference between the fee charged for non-broad based services and the mutual fund business. The regulator also flagged the risk of AMCs indulging in insider trading or even transfer low quality assets from non-broad based funds to mutual funds, violating the principle of fair treatment. SEBI. however. proposed not to allow this transfer and that all the regulation would come under the ambit of Prevention of Insider Trading regulations.

Apart from these, SEBI also proposed that subsidiaries of AMCs registered as a pension fund manager may be allowed to be point of presence (POP) for pension funds and collecting commissions or fees from the investor as permitted by PFRDA , all while protecting the interest of mutual fund investor. SEBI also proposed that AMCs can distribute their funds globally, but shall limit themselves to direct funds. The regulator has given time till July 28 for stakeholders to give their suggestions.