I've lost count of how many times in recent months, I have written an article on regulatory changes that the Securities and Exchange Board of India (SEBI) has made to some aspect of mutual funds. When you are a professional writer and are obliged to come up with a steady stream of interesting topics, then you appreciate every little bit of help you get. And at this, SEBI has been a great help. Of course, my job is easy. I just have to think for some time and then sit and shoot off whatever I've thought. But for those in the mutual fund industry, the pace of change has been intense and unrelenting. Someone calculated the other day that over a 12-month period, SEBI has affected, on an average, one regulatory change every two weeks.
Not all these changes have had an equally strong impact but plenty of them have been big changes that needed a comprehensive response. The biggest one, it goes without saying, has been the abolition of the entry load that was deducted from investors' money. While this one change has led to an upheaval in the industry, there have been many more with a strong impact. Many parts of the huge debt fund business have changed completely. Formerly important types of funds like Liquid Plus funds and Fixed Maturity Plans have ceased to exist or have completely changed in relevance. The method of valuing debt securities is in the process of complete change. Charging of differential loads from different kinds of investors is also over. Funds can no longer pay dividend out of Unit Premium Reserve, and so on.
Besides actual changes of regulations, there have been some far-reaching changes in the approach of the regulator. For example, the high frequency of new funds being launched has completely died down because SEBI is now very rigorous about approving these. Fund companies now have to show that new funds do not effectively duplicate any existing product and that this can be communicated unambiguously to the investor.
It is no secret that fund companies are struggling to keep pace with the business changes that are required to comply with the new regulations. Making changes in a running business is like modifying the engine of a running car. What makes things more difficult is that all these changes have come very quickly, one after another. Some of them have interacting impact in that what can be the solution to one change is ruled out by something else that happens later.
However, the bottom-line is that no matter what the pace of change, it is hard to argue against any of the things that SEBI has done. While the debate over entry loads will probably go on forever, all other changes have a logic that is quite easy to appreciate. Many of them are clear pushbacks against practices that should never have existed. For example, there was never anything defensible about charging different loads and different expenses from larger and smaller investors in the same fund, even when these investors were in different plans of the same fund. Every business is entitled to charge less from bulk customers or customers who are cheaper to service but that should be in different funds.
At the end of the day, it is hard to conclude anything but that in the long run, mutual funds will be better off having a rigorous regulatory structure rather than a loose one. People in any kind of financial services business around the world quite easily forget how much their reputational capital has eroded because of the financial crisis. Harsher regulations, even if they appear to be unfairly harsh, should be taken as a given from hereon.