Making Mfs Palatable

I had begun to wonder whether SEBI (Securities and Exchange Bureau of India) has killed the MF industry, by its over-regulatory attitude. It was prompt in imposing heavy restrictions and penalising those who were found to transgress the dictat even by an iota.

However, when it came to the supporting aspect, it was tied up with bureaucratic red-tapism. Thank God, it has now come out with corrective actions. I sincerely hope that rigor mortis has not set in.

I must make it clear that SEBI took the most appropriate action in the wake of the then existing chaotic situation. All medicines have associated side effects. SEBI should have made a conscientious effort to mitigate the ill effects right from the start. Better late than never.

 

SEBI has finally decided to brighten the future of MFs through SEBI (MF) Regulations, 1996 which was promulgated on 9.12.96. The following are the major steps of interest to investors :

Requirement of listing

A close-ended scheme (CES) can be turned into an Open-Ended Scheme (OES) after a certain period on terms and conditions declared in the prospectus or determined by majority of unit holders.

This is the best boost given. As usual, it was UTI, the big brother, who took the first step and has decided to convert two of their flagship schemes, Grandmaster and Mastergain-92 into open-ended ones from 1.8.96 (1.10.96) and 1.1.97 respectively!

The requirement to list CES as well as OES within 6 months from the closure of the scheme is dropped if the scheme provides periodic repurchase facility within 6 months of its launch, even a restrictive one. Monthly Income and schemes for special target segments like senior citizens, female children, widows, physically handicapped people may not be listed, but should provide repurchase facility.

The sharks in the market have now become toothless

CES can repurchase units periodically and reissue the same without increasing the number of units issued originally. It is also allowed to operate as interval fund i.e., periodically open for sale and repurchase, provided the maximum and minimum of sale or redemption of the units and its periodicity have been declared in the offer document.

This is great! It is in line with the Indian companies being allowed to buy and sell their own shares. This will protect them against an unforeseen bear run.

Pricing of units for sale and repurchase

The repurchase price shall not be lower than 93 per cent and the sale price not higher than 107 per cent of the NAV. Further, the difference between the repurchase price and the sale price shall not exceed 7 per cent, calculated on the sale price.

For a CES floated on a load basis, the initial issue expenses shall be amortised on a weekly basis over the period of the scheme.

In case the scheme provides for partial (I feel this word should have been premature) redemption during the life of the scheme, the amortisation shall take into account the number of outstanding units and the aggregate amount during the relevant periods.

For OES floated on a load basis, the initial issue expenses may be amortised over a period not exceeding 5 years. Issue expenses incurred during the life of OES shall not be amortised.

In both the cases the unamortised portion of the expenses shall be included in the NAV. This portion shall not be considered for determining the fees of AMC and the limitation on expenses.

Great! Now, no MF will be able to punish the investor very heavily for premature encashment. Moreover, the requirement to write off the entire initial launch expenses right in the beginning resulted in the NAV of the units below par and this scared away the investors. Now, MFs have an opportunity to open after launch at above par rates.

Relaxation of limit on investments

No MF under all its schemes should own more than 10 per cent of any companys paid up capital carrying voting rights.

There were several complicated limits on investments by MFs. Any one scheme of an MF was not allowed to invest more than 5 per cent of the capital of any company or 5 per cent of its own corpus in one company. Then again, all schemes of single MF could not invest more than 10 per cent of the capital of the company.

Additionally, the MF could not invest more than 15 per cent of its own capital in an industry. The restriction of investment in privately placed debentures, debts and other unquoted instruments of 10 per cent of the total assets for the growth scheme and 40 per cent for income schemes is deleted.

These restrictions were found to be quite constrictive. The fund managers were forced to forego attractive prices for bulk deal purchases. Some of the excellent companies which come to the market with their initial public offer are excellent buys.

Many investors apply for more shares than they desire in anticipation of the oversubscription. The fund managers could not adopt this strategy. Further, the fund managers, at times, were forced to book losses just to fall in line with the limit.

Moreover, they could not avail of any attractive rights issues. All these restrictions were based on the net asset which was not an absolute figure and fluctuated with the market prices and sales/repurchases of their own units. Keeping track of the various limits on an on-going basis was problematic.

The limit of 5 per cent of the issued capital of a company has been now raised to 10 per cent whereas all the rest of the limits are done away with. Even the restriction on investment in money market is removed. Fund managers will have complete freedom to decide the portfolio composition depending upon their perception of risk and return as long as it does not conflict with the declared fundamental investment objective and policy.

Investment in debt instruments should be only in rated debt instrument not below investment grade rated by a credit rating agency authorised to carry such activity.

Pending deployment of funds of a scheme in securities in terms of investment objectives, the MF can invest in short-term deposits of scheduled commercial banks.

Transfer of investments from one scheme to another scheme in the same MF shall be allowed only if i) such transfers are done at the prevailing market price for quoted instruments on spot basis and ii) such transfers shall be in conformity with the investment objectives of the scheme.

A scheme can invest upto a maximum of 5 per cent of its net assets in any other scheme of the same MF or any other MF, without charging any fees. This ensures that the fund does not become fund of funds.

The funds of a mutual fund scheme shall not in any manner be used in option trading or in short selling or carry forward transactions.

The initial issue expenses in respect of any scheme shall not exceed six per cent of the funds raised under that scheme.

We shall have a look at the rest of the provisions next time.