The Central Bureau of Investigation (CBI) chargesheet filed last month in the Mumbai sessions court alleging breach of trust and criminal conspiracy by the investment team at SBI [Get Quote] Mutual Fund in 2001 in a case related to the purchase of Padmini Technologies, one of Ketan Parekh-manipulated stocks.

The deal resulted in a loss Rs 60 crore (Rs 600 million) to the fund, according to the chargesheet.

The charges leveled by the CBI against former SBI Mutual Fund managers and the way different mutual fund companies, who employ these fund managers, have treated the issue, brings to focus a larger point: What kind of disclosures need to be made to unitholders when it comes to charges that relate to fund management?

The newly-born Lotus Asset Management Company went to the extreme of sacking its head of equities and star fund manager Sandip Sabharwal, on whose strength the business was supposed to be built, without blinking an eyelid.

Principal PNB, which has employed Rajat Jain, one of the other ex-SBI Mutual Fund managers who has been chargesheeted, says it is considering intimating unitholders about the development. Standard Chartered, which has employed Ajay Bodke, who has also been chargesheeted, however, has no plans to inform unitholders as yet. SBI Mutual Fund, which is where the problem emanated, seems unconcerned because none of the chargesheeted employees still work for the firm -- some have moved out, while others have retired.

Thus, we have a situation where one firm, which is yet to get regulatory approval for its maiden offering, is jumping the gun by taking what's probably an extreme measure to protect its image and avoid further scrutiny by the regulator.

On the other hand are inert firms who are unwilling to make basic disclosures to the unitholders about the charges faced by the very people who manage their money. Is a unitholder entitled to know if the fund manager is being scrutinised -- not for wife-beating -- for something that relates to managing his funds? Since the regulation does not explicitly demand a disclosure in this regard, mutual funds are getting away with inaction.

Standard Chartered mutual fund said that the firm was keeping a close tab on the issue while Principal PNB has already informed all the people "concerned", which include the board of directors/trustees and Sebi.

The Sebi mutual fund regulations do require any pending material litigation proceedings incidental to the business of a mutual fund to which the sponsor or any company associated with the sponsor -- including the asset management company, board of trustees/trustee company or any of the directors or key personnel is a party -- to be reported in the offer document.

That is not good enough. Such investigations need to be communicated directly to the unitholders, probably in the newsletter and not in fine print in the offer document, which, in any case, does not reaches the unitholder, considering the way funds are sold these days.

While potential investors have access only to abridged offer documents or forms, which contain very basic information, existing investors have no way of knowing unless they are told.

In case of companies, for instance, regulations necessitate companies to make disclosures about material developments which may be considered price sensitive and could affect the performance of the company and its shareholders.

Listed companies need to report such matters to the stock exchanges and in case of companies approaching the market with an IPO, the pending litigations need to be detailed in the risk factors. The obvious reason for such a disclosure is to ensure that the shareholders are empowered to take an informed decision on whether to hold the stock or dump it given the added risks associated with the development.

For fund investors, the information related to any allegations, even if it not a conviction, is important to decide whether to remain with the fund or not.

It is the fiduciary responsibility of the board of trustees to ensure that the interest of the unitholders is taken care of. That includes ensuring the fund manager is not only competent, but also adheres to best practices and proper risk management to ensure that unitholders' money in not put to undue risk.

Thus, the onus of taking action for any wrongdoing also rests with the trustees. While the law will take its own course and decide the fate of the fund managers, the trustees are well within their rights to continue with the fund managers as long as they are satisfied that the procedures are in place -- and the unitholders are well informed.

Indeed, in the case of SBI Mutual Fund, the capital market regulator had directed the board of trustees to look into the process being followed by the firm to see if anything was amiss. A committee had looked into the investment management process and given a clean chit to the management sometime in 2002-03.

In the stock market, there is always the possibility of investment decisions going wrong, and one of the challenges faced by organisations is to create an environment which supports people and their decisions -- after all, this business is built on trust -- and at the same time minimise errors of judgement. But there has to be trust for that -- of the organisation in the fund manager, and of unit holders in the fund managers.

Tailpiece: Some key officials at the Securities and Exchange Board of India also faced CBI investigations and continued to hold key positions. For instance, executive director Pratip Kar, who quit recently, faced serious charges too, but continued to hold the most important portfolio as the head of surveillance till recently. Who will regulate the regulators?