The damage that has been done is already done but you need to look ahead. If you recollect, the SEBI chairman underlined the need to regulate debt funds and FMPs in a more stringent way. But the key question is how to go about regulating mutual funds. There could be 5 possible options to look at and the regulator may have to look at a combination of all 5 methods.

· SEBI may have to focus on much greater disclosure. The standard disclosure practices are not working in this case. The reason is that FMPs and debt funds have a lot of leeway. FMPs have seen lot of flows in last few months but their investment options are still limited. That is what forced them into slightly higher risk areas. As a result, the gap was filled by promoters and fund managers willing to structure promoter lending via pledge of shares. That is where the problem of disclosure comes in as you cannot make out that it is promoter funding by looking at the fact sheet.

· Mutual funds manage nearly Rs.25 trillion but they are not subjected to the same monitoring and regulation as banks are. The answer may be to treat them like banks. For example, mutual funds lending against promoter shares is actually a banking activity and not a mutual fund investment activity. So; mutual funds must be subjected to the same degree of commitments with respect to capital adequacy and asset recognition that banks are subjected to.

· The regulator must compel the sponsoring AMCs to take part of the responsibility for the losses caused to the investors. In a recent case, HDFC AMC has taken that responsibility on behalf of HDFC FMPs up to Rs.500 crore. After all, when funds charge a total expense ratio of 2% to 2.5%, they must be financially accountable for rash decisions.

· It is also the time to fix individual accountability on fund managers, CIOs etc. For example, fund managers don’t worry about the ED or Vigilance chasing them in case of loans gone awry. It is not just the senior fund staff but also the board of trustees that should be accountable since they have a fiduciary duty to the unit holders.

· Lastly, most investors have a grasp of equity risk but not so much of debt risk. They still treat debt as risk free investments. A little bit of education will go a long way!