Synopsis
To use a light-hearted analogy, this officer shall be the ‘jasoos’ (detective) of the trustees on the AMC. The circular clarifies that the trustees shall continue to be liable to discharge various fiduciary responsibilities cast upon them.
The role of Mutual Fund Trustees was never really in public domain. Investors, who were aware of the system of trustees, with a supervisory role over the AMC, would view it as part of the procedural framework of the structure of a mutual fund. Some investors may not be even aware of the existence of trustees, as it is the AMC that is front-facing. The role of trustees came into the limelight post the Franklin Templeton issue, more so when the agenda for e-voting proposed the trustees as one of the options for winding up shut-down funds.
Some questions were raised when Franklin Templeton moved a resolution in June to provide legal indemnity to the directors of Franklin Templeton Trustee Services in connection with the winding up decision. This was about providing indemnification to the directors of the trustee company.
As per definition, the role of the trustees of the mutual fund is to hold its investments for the benefit of the unitholders. The board acts as a protector of unitholders’ interests: it appoints a custodian for safe-keeping of assets and closely monitors the AMC. It may be practically difficult for the trustees to keep track of all investments and transactions of the AMC or find out any undercurrent that may be going on.
On August 10, 2020, Sebi issued a circular augmenting the resources of trustees of MFs. The circular stated, inter alia, that it is already mentioned in the Sebi MF Regulations that trustees shall obtain internal audit reports at regular intervals from independent auditors appointed by the trustees. This circular provides that trustees shall appoint a dedicated officer having professional qualification.
The officer so appointed shall be employee of the trustees and directly report to the trustees. The scope of work for the said officer shall be specified by trustees from time to time to support the role and responsibilities of the trustees. Further, trustees shall have standing arrangements with independent firms for special purpose audit and/or to seek legal advice in case of any requirement as identified and whenever considered necessary.
To use a light-hearted analogy, this officer shall be the ‘jasoos’ (detective) of the trustees on the AMC. The circular clarifies that the trustees shall continue to be liable to discharge various fiduciary responsibilities cast upon them.
All these are nitty-gritty; whether trustees having legal immunity or not or having a separate officer to peep into what the AMC is doing. The broaderissue, from the perspective of investors, are:
- What is the role of trustees, apart from the legal details, and
- What is the public interface.
In the Franklin Templeton issue, apparently the letter of the law on process was followed; we will know more once the forensic audit of Sebi is completed. Assuming that it was done, investors technically do not have much room for complaint. If it is about the inferior credit quality of the portfolio, it was disclosed every month.
A mutual fund scheme is a vehicle for investment in the underlying market and the risk is on the unitholder. The one issue that remains is about the liquidity of investments; the trustees did not do a proper stress test for tight market conditions and the shutdown was due to the illiquidity of less-than-AAA investments.
The other broad issue is about the public interface of trustees. The annual report of the board of trustees is available on the website of the mutual fund. However, this is more of a procedural requirement as investors at large do not access this document, they at most access the portfolio factsheet.
There is public outreach by the AMC across various platforms for communication about the schemes, which enhances awareness. However, on a similar logic, there is no con-call or webinar held by the trustees for investors. If this is done, say, every quarter where investors / advisers can raise any doubts about the functioning of the AMC, that would enhance confidence. Trustees are regulated by Sebi, but they are ultimately accountable to investors.