The markets regulator Securities Exchange Board of India (SEBI) recently announced the revised risk management framework for asset management companies (AMCs). There are some elements which will be mandatory while the remaining are recommendatory.
The idea behind the new set of rules is to mandate mutual funds to carry out assessment of their risk, and submit it to the regulator about the roadmap for implementation.
What do the new guidelines say?
Under the risk management framework, the mutual funds are meant to do four things: first and foremost, they are supposed to govern and organise, second is to identify risk, third is to evaluate and manage risk, and finally to report risk and related information.
The SEBI also exhorted the asset management companies to inculcate a culture of risk consciousness and for this, the regulator has defined specific roles for chief executive officer, chief investment officer, fund managers and other senior executives. There is also a mandate to appoint a Chief Risk Officer in each asset management company.
There was a need for the risk assessment as a result of growing exposure to risk by funds, newer innovation, and addition to asset classes.
The new rules are meant to be implemented by January 1, 2022, although they may implement these rules prior to that as well.
How will it safeguard the investors?
The appointment of chief risk officer, and cultivating a culture of risk consciousness is aimed to put such systems in place where taking risky bets are at least taken note of, and duly accounted for.
Identifying risk in time, evaluating it and reporting it to SEBI will ensure that the fund houses manage investors’ money with caution and responsibility.
SEBI rules to protect investors’ interest
From time to time, the market regulator tends to introduce newer rules to protect the interests of investors. In early September, 2021, for instance, the SEBI asked the mutual funds to invest a small part of their asset base in their own schemes to synchronise the interests of fund houses with those of investors.
This was part of the larger scheme of skin-in-the-game where the financial interests of fund houses do not remain completely detached from those of investors any more.
Likewise, in April 2021, SEBI mandated the mutual fund key personnel to be paid at least 20 percent of their compensation in the form of units of mutual fund schemes.
So, we can summarise that SEBI tends to impose a set of rules on fund houses to protect the investors’ interest from time to time. The latest regulations mandate asset management companies to identify and evaluate risk, and report the same to the markets’ regulator in the larger scheme of setting up a risk management framework.