SEBI Official Warns Mutual Funds on Microcap and Low-Rating Bond Investments
Tuhin Kanta Pandey, the top official at the Securities and Exchange Board of India (SEBI), issued a statement of caution to mutual funds regarding their dealings in microcap stocks and bonds with low ratings. During a notable public appearance, the chairman stressed the importance of diversification beyond the usual heavyweights but also underscored the caution required in lower market segment investments.
In his comment, he stressed, ‘Investments in micro-cap securities or bespoke debt deals require a high level of caution, especially considering that mutual funds are predominantly retail products.’ Pandey emphasized on the absolute requirement of thorough documentation to ensure transparency and comprehensive due diligence for such investment decisions.
The SEBI top executive also revealed plans to drive forward financial inclusion with incentives targeting first-time female investors. He highlighted, ‘Efforts to promote financial inclusion will be incomplete if we fail to engage women equally. To address this, we are considering an extra allocation for first-time female investors.’
The financial regulator has been proactive in suggesting rewards for distributors to entice new entrants, fostering an inclusive financial environment and stimulating investment behavior. This proposal aims to motivate small investors and broaden the overall investment base as part of an overarching inclusivity drive.
In his public address, Pandey also outlined the growing risks related to operations, including the rising incidences of fraudulent redemptions carried out by imposters. He warned, ‘As scam artists become more innovative in their deceit, our guard must remain up.’
He further stressed on the importance of information sharing in tackling these security challenges. ‘Sharing details about such deceptive practices broadly is fundamental in our fight against financial fraud. The speed at which we share this information could be our most effective tool in this battle.’
The financial regulation body is currently reassessing the classification of mutual fund schemes in its initiative to inspire greater product creativity while aiming to minimize portfolio overlaps. The goal is to enable the establishment of more diverse and innovative financial offerings, promoting a broader investment landscape.
The SEBI, in line with its compliance simplification initiative, has eliminated over 52 reporting necessities for asset management companies. This is a significant step as it aims to streamline and remove undue compliance burdens, allowing these businesses to focus more on their strategic operations.
Moreover, the regulatory authority has anticipated further relaxation of regulations in the coming months as part of its ongoing efforts to improve operational efficiency and promote active participation in the financial marketplace.
However, Pandey also voiced concerns over increased dependence on digital platforms. He warned, ‘As more financial interactions gravitate towards a digital environment, even a single breach can have severe implications on investor trust. Safeguarding data should be as high a priority as guarding their financial investments.’
Finally, while acknowledging the importance of technology, his warning served as a reminder to investment companies that the act of outsourcing does not dilute their overall responsibility. He emphasized that fund houses need to remain accountable at all times, irrespective of whether they choose to outsource certain operations or not.