The Securities and Exchange Board of India (Sebi) has cautioned the mutual fund (MF) sector on a spillover of bad loans from the banking system to debt funds.
“You need to be more watchful. You have to make sure non-performing assets don’t get shifted to MF portfolios by way of transfer of debt,” Ajay Tyagi, chairman of Sebi, said on Thursday. He was speaking at the Association of Mutual Funds in India’s ((AMFI’s) first summit of top executives of the Rs 19-lakh crore asset management sector.
The Sebi chief urged funds to improve their due-diligence. “There have been instances of default in debt schemes. The MF industry needs to strengthen their evaluation mechanism and not only depend on credit rating agencies,” he said.
This comes after a rise in defaults on debt repayment obligations by several firms, including Amtek Auto and Jindal Steel & Power, to which MFs had exposure.
Tyagi said with equity markets at record highs and huge inflow into MF schemes, “it is a testing time for fund managers”. “There is too much of liquidity and limited investment opportunity. This is an issue which is coming to Sebi’s attention. You also need to see how to invest wisely.”
Tyagi asked fund managers to educate themselves and then investors about new instruments such as real estate investment trusts and infrastructure investment trusts. He also praised the funds for taking an active role in better corporate governance by increasing their participation in voting on resolutions proposed by companies. Four years earlier, he noted, over half of MFs used to abstain from such voting. This is now down to less than eight percent.
“That’s how it should be. If you are a major investor in a company, you must participate in the decision making. We are in the process of developing a stewardship code. We want other institutional investors to also get involved in corporate governance,” Tyagi said.
The issue of institutional investor participation had gained importance during recent cases like the tussle between Tata Group and Cyrus Mistry, beside Maruti’s Gujarat plant proposal.
Tyagi also asked MFs to merge more schemes, to avoid confusion among investors. He also asked them for wiser spending on product advertisements, while creating more investor awareness in smaller cities.
A Balasubramanian, chairman of the sectoral body, said the total of assets under management could climb to Rs 94 lakh crore by 2025, from Rs 19 lakh crore.
Anil Ambani, a chairman, Reliance Capital, said the sector should aim to increase the investor count to 600 million in the next five years from 60 million.
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