Mr. P.K. Kaul

Chairman

P.K. Kaul Committee

Mumbai.

Dear Sir,

I have received a copy of the report of the committee to be submitted to SEBI Chairman. I broadly agree with the recommendations of the report. However, I would like to make the following observations on the report.

1. (a) (i) At page 4, para XIV, it has been mentioned that "SEBI found that mutual funds had been set up by public sector banks adopting the trust route because using the route of the Companies Act appeared to be more complex, as it could have led to multiple regulatory jurisdiction. Sufficient information is not available as to whether, a rigorous examination of the advantages and disadvantages of the two alternative routes were undertaken or not. Nonetheless, SEBI (Mutual Fund Regulations) provided for setting up of mutual funds or trusts under the Indian Trusts Act of 1882.

(ii) On page 23 at para 2.26 it is mentioned that setting up of mutual funds as company would have caused hardships and hampered the growth of the mutual fund industry and therefore the SEBI (Mutual Fund) Regulations, 1993 stipulated the setting up of mutual funds as trusts under the Indian Trusts Act.

(iii) In para 2.28, it has been mentioned that there is inadequate evidence to enable a conclusion that other avenues old or new were explored before opting for the trust route.

(b) I am factually unable to agree with the observations made above. SEBI Board did consider as to whether a Mutual Fund should be permitted to be set up as a trust or a company and a conscious decision was taken by the SEBI Board to permit the Mutual Funds to be set up only as trusts under the Indian Trust Act. The trust structure in the Indian context was approved as it was a structure which would provide "arms length relationship", "fiduciary relationship" ,"greater protection to the investors" and enable effective regulation of mutual funds.

( c ) As per the terms of reference the committee was required to look into the feasibility of organising mutual funds as companies. The Committee now seeks to recommend a corporate structure for the mutual funds. There can be no doubt that a corporate structure is feasible for setting up a for mutual fund. Before taking a decision on the same corporate structure of the mutual funds existing elsewhere should be studied. The regulatory provisions, prevailing duties of directors, fund managers and more important whether the corporate structure would protect the interest of investors needs to be studied. In this committee we could not study any corporate model more particularly from the view point of investors protection. A corporate structure of mutual fund would mean a company and its Board of Directors, the trustees company and its Board of Directors, the fund managers and its Board of Directors. From these various legal entities how does the investor know as to who is the entity responsible for protecting his interests. Is it the Board, independent directors, the AMC or its directors? In a trust structure responsibility, liability and obligations are clear to an investor.

2. Para 2.23 deals with the declaration of the holdings by the trustees to the mutual fund. It has been recommended by the committee that interalia the trustees should make monthly disclosures of transactions above Rs.1 lakh to the trust. I firmly believe that the trustees should made disclosures of any transactions in the securities market irrespective of the vale of the transactions. If monthly disclosures become onerous then the trustee should be required to make this disclosures quarterly. In fact disclosures of interest including transactions by the trustees obviates any possibility of Insider trading conflict of interest and also ensures better corporate governance.

3. In para 2.3 it is suggested that due diligence requirements be effectively laid down in regulations. "Due Diligence" to my mind cannot be exhaustively provided for. It is inclusive and would depend on the facts of each case.

4. In para 2.11 it has been recommended that protection of trustees acting in good faith should be considered by providing insurance. I would like to expand the concept of protection to fund managers as well as to investors. We should consider a mechanism for protecting the interest of unitholders on the lines of "Small Investor Protection Compensation" Fund set up in USA.

5.(a) In Para XXIV and 2.29 it has been recommended that a separate statue be enacted for governing mutual funds. I agree that there has to be one comprehensive regulatory framework for regulating mutual funds encompassing at one place all provisions relating to the mutual funds.. The SEBI Mutual fund regulations is an attempt in that direction. If the SEBI (Mutual Fund) Regulations are found not to be comprehensive, then it is recommended that the SEBI (Mutual Fund) Regulations be amended and be made more comprehensive so that under one regulatory framework, all the provisions are incorporated and reliance on some other statute does not have to be placed either by SEBI or any other person.

(b) It has been stated that institutions of importance are set up under important statutes for eg. Banks under Banking Regulation Act, stock exchanges under SC( R) Act, depositories under Depositories Act. To give recognition to critical role of Mutual Fund in the capital market a separate statute should be enacted. I believe that the recognition to the institution is dependent on how the institutions are managed and governed. Even though stock exchanges are set up under a separate statute i.e. SCR Act, SEBI had found that the management and the governance of the stock exchanges left much to be desired and directions to the stock exchanges had to be issued in order to improve their management. Therefore setting up an institution under a separate Act does not help in making the institution healthy. I believe that an institution can function and make contributions to the capital market and be also recognised by the capital market depending on their governance and management and protection to investors instead of enactment of separate statute.

( c) The committee has given three instances where the provisions of the Companies Act do not permit mutual funds to carry on activities in a manner which is conducive to good management. I do not believe that provisions of the Mutual Fund Regulations are in any way contradictory to the provisions of the Indian Trust Act as or Companies Act or that the provisions of Companies Act prohibits the mutual fund. The mutual funds have been in existence for more than a decade. Even assuming that such provisions exist in the Companies Act then it is suggested that the SEBI Act can be amended to override the provision of the Companies Act. By this amendment even the provisions of the UTI Act can be repealed.

(d) Reliance has been placed on the provisions of the USA Act where by a separate statute i.e. Investment Companies Act has been specifically enacted to regulate the mutual funds. It may be mentioned that the scheme of the securities laws in U.S.A. is such that they have a Securities Exchange Commission Act of 1933 and a Securities and Exchange Commission Act of 1934 , the Public Utility Act, the William’s Act (Regulating takeovers) etc. It may also be mentioned that in the USA, there is no separate Companies Act like the Indian Companies Act, 1956. It is within the scheme of the USA Securities Laws that a separate statute was found necessary. On the other hand Indian legislators have placed reliance on the legal framework of the United Kingdom. In the U.K. there is a Companies Act (similar to that of the Indian Companies Act) and they also have the Financial Services Act of 1986 (similar to the SEBI Act and the SCR Act.) It may be mentioned that mutual funds are regulated in U.K. under the provisions of the FSA and not under the provisions of separate statute. There is no conclusion by the committee that the mutual fund industry or mutual fund regulatory framework are in any way inferior to that of USA.

(e) It has been stated that the rights, responsibilities of the board of trustees and provisions for meeting of trustees, unit holders, forum, reporting and disclosures be built in the Mutual Funds Act. However, the Mutual Fund Regulations have attempted to provide for these very issues.

(f) It has been stated that ensuring the independence of independent directors on the AMC and trustees companies becomes extremely complex without a separate statute. However, I feel that the mutual fund regulations can contain provisions for the Board of Managers, the Board of Trustees and the sponsors, AMC, independent directors.

(g) While determining as to whether a separate independent statue should be enacted or not, the investors protection, management of the mutual fund and the scheme of the SEBI Act should be examined. If under the regulations or as a result of provisions in other statutes investor protection cannot be achieved then undoubtedly a separate statute is essential. However, there is no conclusion that the existing regulations in any way lack provisions as a result of which investors interests are not protected. Therefore from the viewpoint of protecting the interest of investors it is not as if that without a separate statute this cannot be achieved. SEBI has been protecting the interest of unitholders under the provisions of the regulations since 1993.

(h) The scheme of the SEBI Act is such that while the charging provisions are in the SEBI Act, rest of the provisions regulating the activity and the intermediary have been left to had provided for in the sub-ordinate regulation ie. Rules and regulations. SEBI concerns itself with not only regulating activities of mutual funds, but also collective investment schemes, takeovers, venture capital funds, issuance of capital to public and shareholders etc. SEBI has notified regulations not only for regulation the activities of mutual funds but also for takeovers, insider trading, venture capital etc. and has notified guidelines applicable to body corporate companies who want to access the capital market either by a public rights or preferential issue. All these activities are as important as the activity of the mutual fund and are regulated through regulations. If the recommendation of the Committee is accepted there should be separate statutes not only for mutual funds but for other activities also.

It is suggested that my observations may be considered by the Committee.

Yours sincerely,

D.N. RAVAL