Sebi on Thursday capped the cross-shareholding in mutual funds to 10 per cent to avoid “potential conflict of interest” and strengthen the “governance structure” of mutual funds.
The regulator said that a sponsor of a mutual fund, its associates, group company and its asset management company will be restricted from holding 10 percent or more stake in a rival Asset management Company (AMC). It said that such entities will be barred from having a representation on the board of another mutual fund house. Sebi chairman, Ajay Tyagi said that the regulator will give a year to such entities to comply with the new Sebi rules.
“We have 40 plus mutual funds so any sponsor of one fund if they have substantial holding in another fund or a board position, that may have a conflict of interest,” said Tyagi after the Sebi board meet in Mumbai.
The new measure will impact the shareholding of UTI Asset Management Company, as four of its promoters–State Bank of India (SBI), Punjab National Bank (PNB), Bank of Baroda (BoB) and Life Insurance Corporation (LIC) will now have to lower their stake to 10 percent or below in next one year. SBI, PNB, BoB and LIC ,which hold 18.24 per cent stake each in UTI AMC also have their own mutual funds.
“I understand that UTI has that issue where public sector banks and LIC have 18.24 per cent (stake) each, so as per this they will have to reduce it to below 10 per cent within a year because each one has their own mutual funds, and also not hold any board position. There is no conflict with the UTI Act. This is a requirement of Sebi for mutual fund regulations,” said Tyagi.
Apart from this, Sebi has also come out with a fresh consultation paper on Investment Advisor in order to segregate advisory and the role of a distributor. This to prevent the conflict of interest between advising of investment products and selling of investment products by the same entity/person. The regulator said that there should be clear segregation between these two activities.
However, mutual fund distributors while distributing the investment product can explain the features of the product to client.
According to the consultation paper, existing registered investment advisers who offer distribution services through a separate division will be given an option to choose between providing investment advice and distribution service before March 31, 2019.
Sebi had first issued a discussion paper that outlined the road map of distribution and advice in October 2016 and a revised consultation paper was issued in June.