MFs question Sebi's unit transfer order

Domestic fund houses have questioned the market regulator’s recent circular mandating unrestricted transfer of mutual fund units between demat accounts. Mutual fund (MF) players have cited operational difficulties in implementing the norm.

Sources in the fund market said the issue was being taken up with the Securities and Exchange Board of India (Sebi) through the Association of Mutual Funds in India.

On finding that mutual fund schemes prohibit transfer on a regular basis, Sebi had directed fund houses to allow free transfer of all mutual fund units from one demat account to another by October 1, 2010.
 

GREY AREAS

• Knowing about beneficiary
• Who should pay exit load
• Issues of dividend payout
• Different TDS provisions for NRIs & non-NRIs
• Scope for potential frauds
• Depositories’ hefty charges for daily data for such transfers
• Stamp duty

“It’s a new concept with a lot of complications and operational issues. A major technical enhancement is required to make this work,” said the chief investment officer of a large fund house.

For instance, he added, if an investor transferred units after holding them for six months and the other account holder sold those units later, who should pay the exit load. Also, dividend payouts and TDS (tax deducted at source) provisions, which were different for NRI and non-NRIs, were also an issue, he said.

Agreeing to it, the chief executive officer of a medium-sized fund house said, “National Securities Depository and Central Depository Services do not send data of such transfers on a daily basis to asset management companies. This becomes a hindrance in determining the actual beneficiary.”

Industry players feared there would be an increase in costs without any material benefit to the investor. “It should be noted that unlike an equity share, whose value keeps fluctuating, the net asset value of an open-ended scheme is comparatively less volatile and a transfer in such scheme does not serve much purpose. Besides, the stamp duty, too, is another grey area, as there is no clarity on who bears the cost,” said an industry player.

Fund houses added that they would be charged Rs 5,000 daily per net asset value (NAV) by depositories to get data for such transfers, which was prohibitively excessive. “Moreover, transfer of units increases activity at the end of registrar and transfer agents, which creates scope for potential fraud and may encourage non-adherence with the Prevention of Money Laundering Act,” said another industry CEO.

Though issues like TDS comes under the Income Tax Department, we wanted Sebi to bring clarity on issues which came directly under its jurisdiction so that the new mandates could be implemented within the deadline, said industry players.

With just a month left in implementation of the norm, industry players said a lot of backend work had to be done. “In case the regulator does not bring more clarity, it is unlikely that the industry can meet the deadline,” said another CEO.