Sebi To Examine Continuance Of Canstar Scheme

Having forced Canara Bank, the sponsor of Canbank Mutual Fund (CMF) to buy units of the controversial Canstar scheme at Rs 23 apiece, the Securities and Exchange Board of India will now examine whether the scheme itself should continue to exist.

Sebi feels that a phased winding up of the scheme is inevitable, but wants the procedure of Canara Banks buying of the units till October 11 to first be completed. Only then will it examine the next question: what should be the post-repurchase status of Canstar.

Winding up of the scheme seems inevitable. But it would need to be done in phases, a Sebi official said. We would like the formalities of repurchase to be completed first, said other officials.

Canara Bank, on September 9, announced it would repurchase the Canstar units at Rs 23 as a one-time goodwill gesture. This is expected to cost the bank about Rs 1,000 crore. The move is the result of a lengthy confrontation between the mutual fund and Sebi, with the Reserve Bank of India coming into the picture later as the regulator for Canara Bank, the sponsor of the fund.

The issue of continuance of the scheme has also cropped up since if several investors opt for the repurchase offer as is expected then Canara Bank would probably be the overwhelmingly dominant investor, if not the only one, in the scheme. This goes against the very nature of a mutual fund from Canstar.

While there has been some discussion that the price offered should have been Rs 26.50 as promised by the scheme, Sebi is of the view that having got Canara Bank to offer Rs 23 per share is no mean achievement, given the schemes current NAV. If investors want, they can move court against the fund. But it is good that Canara Bank has offered to buy the units, a Sebi official said.

Sebis stand on Canstar is set to benefit several investors in a major way, since the ruling NAV of the schemes capital growth units and its 80L units is hovering around Rs 11 and the repurchase price offered by the bank is much higher.

Sources said Sebi was even planning to disallow the fund from trading in securities if it did not honour its commitment to investors.

Sebi is also believed to have indicated in no uncertain terms to both the finance ministry and the RBI that Sebi would not be blamed for the fallout if the government did not support Sebi.