A global body of securities market regulators, including Sebi, has suggested stronger principles for oversight of collective investment schemes such as third- party audits to safeguard the interest of investors.
The principles, mooted by the International Organisation of Securities Commissions (IOSCO), come at a time when India is looking to bring in stronger laws for collective investment schemes (CIS) amid rising instances of public being defrauded by fraudulent money pooling activities.
Outlining the principles, IOSCO has stressed that valuation of CIS is “extremely important” for investors.
“If CIS portfolio securities and assets are incorrectly valued, CIS investors may unfairly pay more for their shares (or unfairly receive less upon redemption), and investors remaining in the CIS also may be adversely affected,” it said.
The grouping, that includes Indian capital market regulator Securities and Exchange Board of India (Sebi), has suggested third party audits for CIS.
There should be a third party, such as an independent or external auditor, to carry out an annual review of its valuation process of collective investment schemes, it said.
Emphasising that such reviews should be “more frequent”, IOSCO has suggested that a third party can provide an independent evaluation that is relevant to a particular jurisdiction’s regulations.
Madrid-based IOSCO’s report titled ‘Principles for the Valuation of Collective Investment Schemes’, has been prepared to ensure that asset valuations of these schemes are not distorted to the disadvantage of investors.
Besides overall valuation, the grouping’s principles focus on the need for having procedures to detect, prevent as well as correct “pricing errors” with regard to CIS.
“Frequent pricing errors, or an escalation in the number of pricing errors whether or not material, should prompt a review and amendment of the CIS’ policies and procedures, as appropriate, to reduce or eliminate the number of pricing errors,” it noted.
Earlier this month, Sebi chief U K Sinha had said that there should be a single regulator for collective investment schemes.
CIS as a subject for monitoring is under Sebi but many schemes such as chit funds are out of its purview.looking to further strengthen the review process, theentity running the CIS should also assess the system followed by the third party.