Why has SEBI proposed tightening responsibilities of mutual funds trustee

Source: The post is based on the article “Why has SEBI proposed tightening responsibilities of mutual funds trustee” published in Indian Express on 14th February 2023.

What is the News?

The Securities and Exchange Board of India(SEBI) has proposed to review the role and accountability of trustees of mutual funds with an aim to protect unitholders’ interests.

It has also put forward some recommendations to enhance the accountability of the board of asset management companies(AMC).

What is a Mutual Fund?

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What is the role of a Mutual Fund Trustee?

Mutual funds in India have a three-tiered structure – mutual fund, the trustees and the AMC. The Board of trustees or trustee company holds the property of the mutual fund in trust for the benefit of the unit holders. 

They appoint an Asset Management Company(AMC) to float schemes for the mutual fund and manage the funds mobilized under various schemes.

They are also expected to exercise supervisory oversight over AMC and its activities so as to ensure that AMC acts in the interest of the unitholders.

What are the recommendations given by SEBI regarding Mutual Fund trustees?

Firstly, trustees should take the help of audits, legal firms and merchant bankers for carrying out due diligence on their behalf.

Secondly, it has proposed the constitution of a ‘Unit Holder Protection Committee’ (UHPC) by the board of AMC. This will help in an independent review mechanism for the decisions of AMC from the perspective of the unit holders’ interest, across all products and services.

How will these suggestions benefit unit holders?

With the increasing scale and reach of the mutual fund industry, trustees’ role in respect of unitholders’ protection assumes greater significance. 

The trustees will ensure that the AMCs act in a manner which is not skewed in favour of AMC’s stakeholders.

The key areas of their focus will be the fairness of fees and expenses charged by the AMC and misconduct including market abuse/misuse of information by the AMC or AMC employees or distributors.