Economic Times: Mumbai: Tuesday, April 29, 2014.
The finance ministry has objected to the capital
market watchdog allowing an entity backed by the mutual fund industry to
function as a self-regulatory organisation (SRO) for mutual fund distributors,
going to the extent of calling it a violation of securities laws.
This marks a major setback for the Securities and
Exchange Board of India, or Sebi, as it questions the legitimacy of the SRO
selection process by which the Institute of Mutual Fund Intermediaries (IMFI)
was chosen. The ministry's view has come to light following its response to a
Right to Information (RTI) query. The selection process has already been
challenged in a March 28 petition before the Securities Appellate Tribunal
(SAT) by nonprofit and unsuccessful applicant Financial Planning Supervisory
Foundation (FPSF), which said IMFI got the licence despite not meeting
eligibility criteria.
FPSF, led by Justice BN Srikrishna, has said the
IMFI approval was "illegal" as it applied for the licence even before
being registered as a company. The RTI application was filed by Shashank
Prabhakar, lawyer with Finsec Law Advisors, which is representing FPSF before
SAT.
"The plain reading of the provisions of
Sebi's SRO regulations indicate that IMFI was not an eligible entity on the
relevant date July 31, 2013," the finance ministry said in its RTI
response. "The subsequent notification dated November 18, even if applied
retrospectively, doesn't empower the Sebi board to relax the condition of grant
of licence under Section 25 of the Companies Act."
IMFI had
submitted its application on the last date, July 31, 2013. Besides FPSF, the
other applicant was the Organisation of Financial Distributors.
Sebi gave
in-principle approval to IMFI, promoted by the Association of Mutual Funds in
India (AMFI), on February 6. The idea behind setting up such an SRO was to
monitor and regulate the 50,000 or so mutual fund distributors in the country
and make sure that they don't mislead investors or sell them unsuitable
products. India's 47 fund houses manage Rs 9 lakh crore. Distributors currently
have to register with AMFI, which has the power to cancel registrations over
violations of the code of conduct or any other mala fide practice. It is
learned that Sebi will be filing its response to the allegations made by FPSF
before SAT, a quasi-judicial body that hears appeals against the regulator, in
a few weeks.
According to
sources, Sebi has told the finance ministry that the legality of the matter
would be decided by SAT.
Soon after
Sebi's SRO decision, FPSF had sought the finance ministry's intervention in the
matter. In its February 10 letter, FPSF said the Sebi (SRO) 2004 regulations
categorically state that the capital market regulator won't consider an
application that's not a "company under Section 25 of the Companies Act,
1956".
According to
the Act, a company gets incorporated on the date the registrar certifies it. In
the case of IMFI, the date of incorporation is August 2, 2013, two days after
IMFI submitted its application to Sebi.
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