More transparency, greater protection for investors
March 3, 2010
In an attempt to bring in more transparency and accountability to the mutual fund business, SEBI has come up with circular stipulating norms while payment of commission, declaration of dividends and fees charged to end investors.
Author : FSM Content Team
SEBI has taken multiple steps towards bringing more transparency in the mutual fund business thereby protecting the interests of investors. In the circular dated 15 March 2010, the market regulator has laid down guidelines for the brokerage paid to the associates of companies, the process for new fund offers and dividend distribution and limiting the charges borne by retail investors.
Reduce New Fund Offer (NFO) period to 15 days for all schemes barring ELSS from the present limit of 30 and 45 days for open-ended and close-ended schemes respectively
The fund would be managed using the corpus collected during the NFO period i.e., from the assets under management of the fund. So there would not be much difference in the Net Asset Value of the fund when the fund re-opens for subscription after 15 days unless the market is extremely volatile
SEBI has introduced additional mode of payment for NFOs. Application Supported by Blocked Amount (ASBA) would ensure that the money leaves investor’s bank account only on allocation of units. In case, the application gets rejected, the investor need not worry about refund from the fund house. The ASBA would be applicable for all NFOs launched on or after 1 July 2010
From now on the dividend ought to be paid out from the realised surplus and not from the Unit Premium Reserve. This practice would set apart the fund houses which have been declaring dividends from the unit premium reserves. The circular states that, “When units of an open-ended scheme are sold, and sale price is less than face value of the unit, the difference between the sale price and face value shall be debited to distributable reserves and the dividend can be declared only when distributable reserves become positive, after adjusting the amount debited to reserves.”
Subsequent to the landmark move to abolish entry load on mutual funds in August 2009, the SEBI circular states that no additional fee should be charged to investors
There are several fund of fund schemes in India which invest in the mother or the offshore fund. According to the circular, there should be no revenue sharing agreement between offshore funds and the fund of fund schemes in India as the monetary benefit may create a conflict of interest. This move would in effect reduce the expenses on the fund of funds scheme
The regulator has been quite active in the mutual fund space rolling out norms for the benefit of retail investors. In fact, several policies and guidelines have been issued by regulators all over the world since the global credit crisis. Definitely, the bankruptcy of biggest financial institutions emphasises the need for greater accountability and investor education. Such initiatives need to be suitably supported with measures for increasing financial literacy in the country. Only then, the significance of these measures can be understood by the general public and would result in greater reach for mutual funds in India.
The Content Team is part of iFAST Financial India Pvt Ltd
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