International Advisory Board demands SEBI to extend mutual fund reach

The Securities and Exchange Board of India (SEBI) – appointed International Advisory Board (IAB) held that there is a requirement to broaden the reach of the mutual fund industry both horizontally and vertically.

The members of the IAB, in addition to the Chairman, SEBI, are: Viral Acharya, Jane Diplock, Mark Maletz, Maureen O’Hara, Arvind Panagariya and Andrew Sheng.

The Board also stressed that in order to raise the involvement of households, the mutual fund industry had to educate the investors of the charm of mutual funds in terms of returns and cost effectivity, likened to other financial products.

The function of the IAB will be to guide SEBI and, in doing so, bring in the global experiences and rising developments and challenges. The IAB will meet two times in a year.

The IAB emphasized the demand for the mutual funds to offer lifecycle products along with plain vanilla products. It underlined the demand to have in place an effectual model for regulation of distributors. It also advised that SEBI might consider promoting competition in the industry while asserting on transparency and diluting dependence on the existent channels of distribution by increasing the distribution of mutual fund products via alternative channels such as Internet.

The IAB emphasised the demand to have a trading platform for smaller companies. The IAB was notified of the state of affairs existing in the Indian primary market. The IAB stressed the demand to have a listing and trading platform for smaller companies, to tackle the conflicts of interests at the level of the market intermediaries and to make the enforcement actions better. It suggested SEBI to dig into the provision of greenshoe option for price stabilization and independent research coverage of listed companies for a few years post-listing via a common agency.

After taking note of the patterns in some of the Financial Action Task Force (FATF) obedient countries, the IAB proposed SEBI to explore risk-based customer due diligence processes without granting any sort of exemptions to any category of investors.

The IAB took note of the risk management mechanisms in place in the equity and equity derivative segments in India. It suggested SEBI on the demand to beef up the legal model to defend the collaterals of the clients posted with the brokers. The IAB also considered on the global developments related to algorithmic / high frequency trades and co-location and the resultant challenges to risk management.

As a step towards inter-operability of central counterparties, the IAB advised SEBI to order common standards/ protocol for market participants. It also investigated the ways to canalize domestic savings into the securities markets so as to aid meet the growth targets. Amidst the steps advocated by the IAB are: development of a vivacious corporate bonds market and digging into the introduction of securitized debt instruments and real estate investment trusts with suitable risk management.