Views on improving the integrity of global capital markets
02 March 2012

Investors Gain As India Tightens Reins on Asset Managers and Financial Advisers

From issues of transparency to the suitability of investment advice, the Indian fund management industry is undertaking several initiatives to enhance investor protection in this nascent market.

Most recently, the Securities and Exchange Board of India (SEBI) stepped up efforts to improve disclosure at mutual fund firms. To that end, it has asked India’s 44 fund houses to provide details of all their fund schemes, including information on benchmarks and returns. Asset managers were asked to provide the most recent six-month returns relative to a suitable benchmark, as well as overall returns for 2009, 2010, and 2011 and compounded returns for the past three and five years. In addition, SEBI asked for the amount of assets under management for each fund scheme and for details on current and past fund managers, including their tenures. The intended goal is to help investors assess the quality of their investments and the skill level of their fund managers.

This move by the regulator to enhance transparency is the latest step toward improved investor protection in India. Indeed, in 2009, the common practice of charging entry loads was abolished, and, as a result, incentives for aggressively and “happily churning” investor portfolios have reduced dramatically. In June 2010, education requirements for investment advisers were raised. As a result distributors, agents, or any other person engaged in the sale of mutual fund products are nowadays required to have a valid certificate from the National Institute of Securities Markets (NISM).

In its pursuit of stronger investor protection, the SEBI also is actively seeking comments from experts in the investment community. At the end of September 2011, it issued a concept paper with a view toward enhanced regulation of investment advisers and sent out an invitation for public comment. SEBI’s areas of interest included conflicts of interest in distribution of financial products and the obligations of investment advisers, such as fiduciary responsibility to investors.

The Indian Association of Investment Professionals (IAIP), a member society of CFA Institute, was one of the organizations that responded to SEBI’s concept paper. To a great extent, IAIP was supportive of SEBI’s initiatives as proposed. It commended SEBI for taking the right steps toward ensuring suitability of advice, and explicitly supported the proposal that investment advisers, or their representatives, be required to perform adequate risk profiling of clients before providing any investment services. At the same time, however, IAIP suggested that SEBI also consider asking investment advisers to examine the financial goals and investment objectives of their clients. These are important elements to ensuring the suitability of investment advice.

Investor protection is imperative as India continues the evolution of its investment industry. With its recent regulatory moves, SEBI has taken bold steps to create a framework that will considerably improve investor protection and disclosure. The recent moves toward establishing best practices — and the resulting higher levels of market integrity — should contribute to increased sustainability of India’s capital market.

With a commitment to best practice, two Indian companies already have chosen to comply with the CFA Institute Asset Manager Code of Professional Conduct — joining a growing group of global investment management firms demonstrating a strong commitment to high standards of ethical practice.

As more pension funds make compliance with the Asset Manager Code a condition of contracting with asset managers, these two firms are likely to have a competitive advantage. For the Indian capital market as a whole, these moves signal promising developments for improved investor protection ahead.

About the Author(s)
Alexander Flatscher, CFA

Alexander Flatscher, CFA, is a former director of professional standards at CFA Institute. He was responsible for promoting the ethical standards, policies, and positions of CFA Institute in the Asia-Pacific region.

2 thoughts on “Investors Gain As India Tightens Reins on Asset Managers and Financial Advisers”

  1. Partha Ghosal says:

    Thanks, its a good information for every investor including FIIs.

  2. Regulator in india is increasingly concerned towards mispresentation and investor good and hence a series of reforms/changes are underway including this one.

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