Sebi takes steps for regulating mutual funds in India

It appears that investors in India are losing interest in mutual funds. I believe some measures have been announced by SEBI to increase confidence in these funds. NRIs would like to know the details. - S K Chari, Doha

Recently, the Securities & Exchange Board of India has made it mandatory for mutual funds to invest atleast one percent or a maximum of Rs50 lakhs as seed capital in all their open-ended schemes. This will ensure that all the 44 players in the sector will have a stake in the performance of the scheme which may enthuse investor confidence.

Further, Sebi has increased the minimum net worth of asset management companies from Rs100 million to Rs500 million. This will ensure that only serious players will enter the business. SEBI has also recommended to the Government that an additional tax incentive of Rs50,000 be provided under section 80-C of the Income-tax Act, 1961. Alternatively, the exemption limit of Rs1 lakh under this provision should be doubled. However, this suggestion can only be implemented by the new Government which will present its budget proposals in July this year.

Though some listed companies in India maintain high standards of corporate governance, some companies merely pay lip service to this principle which is embedded in the new Companies Act. Does the Indian Government have a mechanism to ensure that directors adhere to corporate governance principles? R C Nayak, Dubai

The corporate governance framework for listed companies has been strengthened by SEBI making it mandatory that all related-party transactions should be approved by shareholders by passing a special resolution. Wherever such transactions are material in nature, prior approval of the audit committee will need to be taken. Provision is also made for greater disclosure of remuneration policies and for setting up of a stakeholders’ committee.

The Government has also made it mandatory for each company to set up a whistle-blower mechanism. The system for evaluating the performance of senior executives and members of the Board is also stipulated. An independent director will now be able to serve a maximum of two terms of five years each. Atleast one board meeting in a year will be of only independent directors at which the promoter-directors and executive directors will need to be absent so that the independent directors can freely and frankly discuss the critical issues pertaining to the company.

The tax GDP ratio in India is one of the lowest. It is well known that tax evaded funds are stashed in offshore countries. Is the Indian Government taking assistance from international agencies in this regard? -B K Srinivasan, Manama

The Indian Government has signed a protocol with the Organisation for Economic Co-operation and Development.

This international body has now proposed a new mechanism to combat the menace of offshore investment of tax evaded funds.

This mechanism will be approved at the G20 Finance Ministers’ conference in Sydney. India has signed the OECD’s global standard protocol for automatic exchange of information which will be used to detect cases of offshore tax evasion. The new proposal makes it mandatory for all countries to obtain information from their financial institutions and exchange such information with other countries on a regular basis. The financial institutions will have to give a report on the types of accounts and securities in which funds are invested. This is meant to reinforce global anti-money laundering standards.

The writer is a practising lawyer, specialising in tax and exchange management laws of India.