The Securities and Exchange Board of India (SEBI) announced not long back. images

Presently, mutual funds are not allowed to appoint a custodian belonging to the same group, if the sponsor of the mutual fund or its associates hold 50 per cent or more of the voting rights of the share capital of such a custodian or where 50 per cent or more of the directors of the custodian represent the interests of the sponsor or its associates.

The Board has decided that the custodian in which the sponsor of a mutual fund or its associates are holding 50 percent or more of the voting rights of the share capital of the custodian, would be allowed to act as custodian subject to fulfilling the following conditions i.e. (a) the sponsor should have net worth of atleast Rs.20,000 crore at all points of time, …

To provide a perspective on this, the last reported net worth of Lehman was $19.283 billion which is about five times the Rs.20,000 crore stipulated in the above announcement. (The Lehman figure is from the quarterly 10-Q report filed by Lehman on July 10, 2008 about two months before it filed for bankruptcy.)

Even assuming that the reported net worth is reliable, what I fail to understand is the implicit assumption in the world of finance that wealthy people are somehow more honest than poor people. As far as I am aware, the evidence for this is zero. This widely prevalent view is simply the result of intellectual capture by the plutocracy.

Capital in finance has only function – to absorb losses. I would have understood if SEBI had proposed that a variety of sins of the custodian would be forgiven if it (the custodian and not its sponsor) had a ring fenced net worth of Rs.20,000 crore invested in high quality assets.