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Friday, November 06, 2009

MF's back-office services may come under Sebi watch

Fund accountants and administrators, who have been providing back-office services to the mutual fund industry for close to a decade now may soon come under the regulatory framework of market regulator the Securities and Exchange Board of India (Sebi).

Sebi is planning to introduce the concept of professional fund accountants and administrators in the country. At present, it is the custodial service providers that provide administrative support to fund houses.


Basically, fund administration services involve security pricing, net asset value (NAV) calculation, maintenance of books of accounts, NAV reporting and preparing financial statements, among others, for fund houses. These are critical functions, as they have to be done on a daily basis.

At present, custodians are registered with Sebi, and governed by the custodian regulations. However, these regulations do not cover fund accounting and fund administration activities, which are value added services provided by custodians.

In case of a lapse on part of the fund accountants, knowingly or unknowingly, the regulator is powerless to act against them in the absence of any specific regulatory framework. Also, since asset management companies (AMCs) enter into a bi-lateral agreement with the service provider (i.e custodian), fund houses are required to comply with the Sebi regulations and not the service provider.

Barring a few top fund houses which do fund accounting in-house, most fund houses have outsourced their back-office activities to custodians.

The thinking within Sebi is that since these service providers are appointed by the AMC, the valuation methodology may lack an independent view.

In some markets such as Indonesia and Thailand, regulations require fund accounting and administration to be performed by a registered professional entity which independently performs these activities and reports to the regulator.

According to industry sources, the regulator had recently discussed this issue with market participants. “As far as the functioning of the AMC is concerned, this will bring in more transparency,” said a senior official with a foreign custodian bank.

“In terms of day-to-day functioning, there will not be much of a difference, but it will increase our accountability and there could be some restrictions as well,” the official added. 

source: ET

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