Markets regulator Sebi on Monday directed renaming of dividend options of mutual fund schemes and also said investors need to be nearly communicated that certain portion of their capital can be distributed as dividends.
As per regulatory requirements, when units are sold and sale price (net asset value) is higher than the unit's face value, a portion of the sale price, representing realised gains, has to be credited to an equalisation reserve account. This can be used to pay dividend.
According to recommendations of the Mutual Funds Advisory Committee (MFAC), Sebi said all the existing and proposed mutual funds schemes shall name or rename the dividend options in the prescribed manner.
Dividend payout option has to be renamed as "Payout of Income Distribution cum capital withdrawal option," the regulator said in a circular.
Dividend re-investment will be renamed as "Reinvestment of Income Distribution cum capital withdrawal option", while the name prescribed for dividend transfer plan is "Transfer of Income Distribution cum capital withdrawal plan".
The changes are not to be treated as fundamental attribute change, it added.
"Offer documents shall clearly disclose that the amounts can be distributed out of investors capital (equalization reserve), which is part of sale price that represents realized gains," Sebi said.
It also asked asset management companies (AMC) to ensure that the disclosure is made to investors at the time of subscription of such options/plans.
In addition, AMCs are required to ensure that consolidated account statement given to the investors discloses a clear segregation between income distribution (appreciation on NAV) and capital distribution (equalisation reserve), whenever distributable surplus is distributed.
The changes shall be effective from April 1, 2021, the regulator said.
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