The regulator has asked all AMCs to to maintain records in support of each investment decision indicating the data, facts and opinion on the investments made.

Sebi's move follows its recent inspection reports on mutual funds. "We have come across instances wherein the companies have never paid interest and principal amount to mutual funds, particularly when the securities were bought on private placement basis,'' says Sebi in a recent circular issued to all mutual funds.

Sebi has asked AMCs to record the basis for individual investment decisions taken while investing in equity and debt securities. "While there should be a detailed research report analysing various factors for each investment decision taken for the first time, the reasons for subsequent purchase and sales in the same scrip should be recorded," it has stated.

Sebi has advised the AMCs to pay specific attention in cases of investments in unlisted and privately-placed securities besides unrated debt securities. Due diligence should be exercised in caes of NPAs, transactions where associates are involved and the instances where there is poor performance of the schemes.

The market regulator has asked the AMCs to report the compliance of this regulation in their periodical reports to the trustees and the trustees in turn have to report to Sebi in their half-yearly reports. The AMCs are required to report to Sebi the details of their compliance and the system developed to ensure due diligence by August 16, 2000.

Mutual fund officials say this is a step in the right direction. "The onus is back on the asset management company. Because, there is often a tendency to slip away and get carried away when there is momentum-buying in the market," says the chief investment officer of a mutual fund.

The market regulator's move also comes in the wake of a number of mutual funds investing in unlisted shares at the time the market had peaked. These shares were taken up on private placement basis ahead of a company going public. But when the markets crashed after February, most of these companies could not enter the primary market. Funds who had invested in such companies at very high prices find that their valuations now are negligible.

Some of these investments made by mutual funds could have been speculative in nature, which is one of the reasons why Sebi has tightened the norms, says a fund manager. In the US, the Securities and Exchange Commission makes it mandatory to maintain investment summaries, he adds.