Should You Trust RTAs with Your Mutual Fund Holdings?
Dec 03, 2019

Author: Divya Grover

Can You Trust RTAs with Your Mutual Fund Holdings
(Image source: Image by Vitabello from Pixabay )

After IL&FS, DHFL, and PMC Bank (amongst many others), Karvy Stock Broking (KSBL) is the latest one to join fraud bandwagon.

On November 22, 2019, capital market regulator SEBI banned KSBL from taking on new clients and executing trades for existing customer for allegedly misusing pledged securities of its clients to raise fund for its group company Karvy Realty.

SEBI estimates state that securities worth Rs 2,800 crore from over 90,000 clients were misused between April 01, 2016 and October 19, 2019. The transaction is in violation of SEBI's June circular, which required all brokers to unpledge all client securities by September 30.

In the aftermath of this non-compliance with SEBI norms, NSE and BSE have suspended KSBL's trading licence for all segments.

Are mutual funds at risk because of such scams?

Most AMCs outsource the task of maintaining the records to third parties in an attempt to reduce their cost. Karvy Fintech (KFPL) is a Registrar and Transfer Agent (RTA) to 23 fund houses. This naturally raised concerns about the safety of the investors' investments in its mutual funds.

The primary role of RTA is to maintain investor record. This includes functions such as tracking purchase and redemption transactions, updating units of scheme for investors, updating investor's personal information, keeping investors updated about information related to their investment/s, etc.

But unlike stock brokers, RTAs cannot avail power of attorney to transact in investors' money. In case of mutual funds, all transactions related to investors' account are done at the fund house's end directly or through exchanges, i.e. there is no intermediary involved.

Besides, all RTAs have to be registered with SEBI and they are subject to scrutiny from the regulator as well as the fund house.

This means that the ban on KSBL will have no impact on KFPL. Mr V Ganesh, MD and CEO of KFPL in an interview to Cafemutual said there is no direct or collateral impact on KFPL. The company is majority owned by General Atlantic (83.25%) and they are not an associate or group company of Karvy. He also assured that investor's money and data is safe at KFPL. The company is in the process of rebranding itself to reflect their independent identity.

While Mr V Ganesh has assured that investors' money at KFPL is safe, one cannot fully rule out the possibility of mutual funds being vulnerable to fraud.

Few months back it was reported that the owner of Avon Cycle - Mr Onkar Singh Pahwa lost Rs 60.79 lakh of his mutual fund investments through a cyber-scam. The fraudster had opened a bank account using a fake driving licence in the name of the investor. Then he/she changed phone number, email address, mailing address, and signatures, among others details in the mutual fund records before redeeming the investments.

[Read: Recent Fraudulent Activity In Mutual Funds Is An Eye-Opener For Investors]

Naturally this incident highlighted the questionable safety of an investor's investment. The precarious nature of the case opens the door to suspicion that due diligence and administrative processes were compromised at the bank and, perhaps, at the concerned mutual funds/their Registrars and Transfer Agents (RTAs) as well.

With the rise in digital transactions, the instances of frauds are also increasing. This makes it necessary to take certain steps to safeguard your investment. Here is how you can do it:

  • Register your mobile and email id for all your folios to receive alerts relating to every transaction. In case of change in number or email id, update the details with fund house.
  • Don't ignore any communication from your bank, RTA, and mutual fund house you have invested in
  • Do not share sensitive information such as bank details, mutual fund folio details, identity proof with unknown people and even with friends, co-workers, etc.
  • Keep track of your investment regularly and in case of any discrepancy in details, report it to the concerned authorities immediately. There are various online platforms and apps where you can view consolidated details of all your investments.
  • Avoid giving blank cheques to any sales intermediary. Always transact with responsible intermediaries that offer the best assistance in case of any discrepancy
  • Before you submit any forms, identity proof, bank details, ensure it is required by the law and the seeker is following the standard privacy measures
  • If you are investing via online, ensure you are accessing the right website and following the internet hygiene protocols

Moreover, banks, intermediaries, fund houses, RTAs need to take all necessary steps to prevent such incidents and protect the interest of mutual fund investors. An alert at any stage by them or the investor himself can prove to be vital to foil any attempt at fraud.

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