MFs and the great expectations from Sebi reforms

The last 14 years have been particularly eventful for the Indian MF industry as there has been constant churn on account of regulatory changes and market reactions. Sebi issued around 200 circulars during 2012-2023, many of them amendments to regulations and extension of timelines pertaining to the MF industry.

Sebi’s big bang reforms relating to MFs started in June 2009 with the abolition of the 2-2.5% entry load, which was hitherto considered a major disincentive for retail investors. On the eve of implementing this major reform—within a very short period of the Sebi decision—many market participants felt that the timeline was too short. However, Sebi’s response proved to be an important policy-implementation lesson. The speed of change on exit of entry load was, probably, a forerunner for many fast-paced reforms to get unveiled in subsequent years, and the impact has been far-reaching.

Two substantive regulatory reforms thereafter have been the introduction of direct plans, which was touted as a game changer, and categorization and rationalization aimed at decluttering the then existing industry model. The direct plans have thus far completed 10 years, yet individual assets—about ₹24 trillion as of April 2023—are still primarily distributor-driven.

The industry reactions to boundaries defined for multi-cap funds led to the introduction of another category called flexi-cap funds. However, the performance of flexi-cap funds has been no better than that of multi-cap funds. In fact, of late, many MFs have launched multi-cap funds.

These episodes raise questions on the industry’s response to reforms. While many of the regulatory directives are substantive, some of them are for ironing out the sharp edges generated by the previous set of reforms and the way the industry and market have moved in response to such reforms. While the industry has raised concerns about the ability of market participants to adjust to such reforms in quick succession, its inertia and inability to catch up with frequent changes are seen as ‘obstacles’.

Inadequacy in terms of self-regulation is also a reason for frequent regulatory changes. As Sebi chairperson Madhabi Puri Buch said recently, “If Amfi (the association of mutual funds in India) fails to adopt self-regulation measures, Sebi will have to step in to ensure investor protection”. She emphasized that the industry should focus on upholding the spirit of the law and not merely on compliance. Ethical, fair and efficient self-regulations will go a long way in reducing regulatory burden. Globally, self-regulation has played a very important role in the development of the securities markets.

The MF industry did benefit substantially from reforms. Growth in assets under management (AUM), consolidation of schemes and plans, cost reduction, and diversification of investor base, among others, all indicate substantial positives. The outcome of such reforms has been positive due to the combined response from regulated entities, investors and the market in general. Given the many unknowns here, it may be better if reforms are planned in a more consolidated manner and implemented in a sequential manner.

For such a calibrated, sequenced regulatory approach to happen, the industry has to take the lead by effective self-regulation focussing on the interest of the investors. Otherwise, given the trade- off between protecting the interest of the investors versus stability of the participants and the industry, the regulator tends to tilt towards the former. The proposed MF lite regulations for plain vanilla products is a clear indication of the intent of the regulator to reduce the industry’s compliance burden. By implementing such reforms in full spirit, the industry could herald a fresh era for regulatory changes; a stable and predictable one.

Dr C.K.G. Nair is the director and Dr Rachana Baid is professor at the National Institute of Securities Markets (NISM).

Updated: 26 Jun 2023, 10:26 PM IST