Capital market regulator the Securities and Exchange Board of India (SEBI) is planning to form a panel to examine conflicts of interest in mutual funds (MFs) between different investor classes such as retail and wealthy, according to a report in The Economic Times.
Citing a person familiar with the plan, the report said the panel will review a rule permitting MFs to offer advisory services and manage different investment products under different categories. SEBI is yet to announce the formation of the panel.
The latest attempt to review MF operations is part of a regulatory attempt to address complaints that retail investors in some cases are given a raw deal. MFs, besides managing retail investors' investments, offer portfolio management services to rich and corporate clients. They also manage and advise offshore funds, pension funds, provident funds, venture capital funds, insurance funds and exchange research, creating conflict of interest.
These businesses provide income to MF houses at different rates. So, the prospects of higher income from corporates or wealthy individuals may make the asset management company (AMC) compromise the interests of retail investors. An AMC earns 1.75-2.5 per cent as fees on its equity schemes, while in portfolio management services, it gets a share of the profit in addition to fund management fees.
''Possible conflict of interest is inherent and intrinsic to the asset management business,'' says a SEBI discussion paper. ''These potential conflicts may manifest themselves in many forms, including front-running, insider trading and unfair treatment to select investors.''
The regulator has been cleaning up the mutual fund business, which, despite a two-decade history, is concentrated in cities and is dependent on corporate and rich clients' money.