SAT's far-reaching relief to MF investors

A 16-page order from the Securities Appellate Tribunal (SAT) is bound to be keenly analysed by the mutual fund (MF) industry due to its potentially far-reaching repercussions.

A foreign fund house alleged to have changed the “fundamental attributes” of a scheme without informing the unitholders has been directed to compensate two investors.

Tuesday, the SAT pulled up HSBC Mutual Fund for not following the norms clearly laid down by the Securities and Exchange Board of India (Sebi). The asset management company has been directed to provide an exit option to two investors who filed an appeal with the tribunal.

SAT also rapped Sebi for not giving this relief on the original complaint, after having agreed the scheme’s fundamental attributes had indeed been changed.

HSBC MF has been directed to provide the two complainants

Subramanian R Venkat and his wife, Anuradha Venkatasubramanian, with an exit route based on the net asset value (NAV) as on the date of changing the “fundamental attributes” of the scheme. “This... does not mean that the appellants who have been agitating the matter can be deprived of their right to exit the scheme as on the date of the change at the then prevailing NAV,” says the order.

BACKGROUND
The case goes back to 2003, when HSBC MF launched HSBC Gilt Fund with two plans, short term and long term. The two investors put in a total of Rs 2.52 crore in the Short Term plan that, according to its offer document, would invest in gilts with an average maturity not exceeding seven years and modified duration not exceeding five years.

According to the two complainants, the monthly statement they received in February 2009 showed a sharp erosion in the value of their portfolio and the net asset value (NAV) fell nearly 10 per cent in three days.

On enquiring with the distributor, they were informed that the long term plan was wound up and the average maturity of gilts had changed for the short-term plan, too. From the earlier five to seven years, it was changed to not exceeding 15 years. The words ‘short term’ were also dropped from the name of the scheme and the benchmark index was changed.

The complainants alleged the fall in NAV was on account of the changes in the fundamental attributes of the scheme. This was done without informing the unitholders and without giving a reasonable opportunity for exiting the scheme. They further allege they were completely unaware of the changes until March 2009, when they did exit. After this SAT order, the complainants will be given an exit option based on the NAV as on January 5, 2009.

The tribunal has criticised Sebi’s whole-time member for the way the matter was dealt with. “We are really amazed that the whole-time member after recording a finding that... (the fund) changed the scheme which affected the interest of the unitholders without complying with Regulation 18(15A) of the Regulations, failed to issue directions... for complying with the provision. We are satisfied that the whole-time member grossly erred in not issuing the appropriate directions in this regard,” says the 16-page SAT order.