Sebi asks MFs to hone due diligence, playing on debt funds

Mutual funds have to work on due diligence practices before picking up corporate bonds and should not just rely only on credit ratings given the rising defaults, Sebi chairman Ajay Tyagi said today.

"There are instances of defaults on debt portfolio so naturally mutual funds need to strengthen their due diligence and evaluation mechanisms and not only depend on credit rating agencies," Tyagi told an Amfi summit here.

The Sebi chief also warned MFs against playing too much on debt funds, given the poor shape of many corporates, also the bad loans in the banking system and the possibility of some of such funds finding their way into the fund houses.

"Care should be taken that NPAs do not get shifted to MF portfolio by way of debt transfer," Tyagi warned.

The warning from the markets watchdog comes amidst many companies including Amtek Auto, Jindal Steel & Power, Ballarpur Industries, having defaulted on their debt coupon payments in recent past and given the pathetic shape of the balance sheets of many companies and their possible liquidation in the medium term.

Last fortnight as many as 12 largest defaulters were named by the Reserve Bank and asked banks to refer them to the National Company Law Tribunal.

These 12 companies like Essar Steel, Bhushan Steel, Bhushan Power, Lanco Infra and Amtek Auto among others owe over Rs 2 trillion to banks, which is a quarter of the entire bad loans of the banking system.

The others named by RBI are: Alok Industries, Monnet Ispat, Electrosteel Steels, Era Infra, Jypaee Infratech, ABG Shipyard and Jyoti Structures.

Of these, already Essar Steel, Bhushan Power, Bhushan Steel, Lanco, Amtek and Electrosteel have already been referred to NCLT for insolvency proceedings by banks.

Asking large institutional investors to play a more active role in ensuring better corporate governance, Tyagi said they need to to get more "actively involved" in monitoring corporate governance.

But he was quick to note that MFs compared to other institutional investors are far more responsible when it comes to corporate governance wherever there are invested in.

"From 2012-13, when 51 percent of MFs strayed from voting decisions, in 2015-16 it has come down to only 8 per cent. MFs have been participating in corporate governance and decision-making at boards. This is very encouraging. We want other investors to also do the same," Tyagi said.

Alleged lack of corporate governance came to the fore at the country's most respected corporations like the Tatas and Infosys in recent times.

Tyagi also reiterated call for asset managers to consolidate schemes saying too many funds are creating confusion. "There are over 2,000 schemes being run by 45 fund houses. More schemes lead to confusion among investors."

Supporting consolidation in the industry, he said merger or consolidation can improve ease of doing business.

"There was also the tax issue and the government has agreed to it but I think it needs to be pursued by Amfi so that mergers can take place," Tyagi said.

Asking the industry to tap the vast untapped hinterland instead of being content with the top 15 cities, he said, "there is good penetration beyond the top 15 cities but more needs to be done. Despite doubling of AUM only 16 percent AUM come from beyond the top 15 cities."

Pointing out that those who have trodden hinterland path have benefited immensely, he said, "AUMs beyond the top 15 cities has more than doubled since 2013-14. This is a matter of satisfaction that MFs are spreading to more areas and remote towns and more increase in equity schemes shows more individuals are participating."

This has also led to an increase in the portfolios which have grown to 5.7 crore. Besides, equities funds are also outperforming their benchmark indices, which shows that "MFs have emerged as a back bone of domestic investments. They have provided a stabilising factor against global and macro situations," the chairman said.

Tapping the hinterland is also needed to achieve the Amfi projection of taking the AUM to the century trillion mark, he said.

"The Amfi has projects the industry AUM of Rs 94 trillion by 2025. This will not be possible only from the top 15 cities. It should be a core strategy for MFs to strengthen investors base."

On the move towards allowing a combined KYC for all financial sector investments through the bank account, he said he fully supports this and added that Sebi is in advanced discussions with government and RBI for having simplified and uniform KYC."