The Securities and Exchange Board of India (Sebi) has directed mutual fund (MF) houses to take action against distributors who circumvent norms to get the same day’s net asset value (NAV) in debt schemes by splitting their purchases to ensure the Rs 1-crore limit is not crossed.
The securities market regulator has asked MFs to review the conduct of these distributors, who break the investments into multiple applications to comply with Sebi’s NAV norms for debt schemes “in letter but not in spirit”.
Sebi has also asked MFs to take appropriate action to reimburse the losses incurred by existing investors in schemes where multiple applications were made by certain entities to circumvent the requirement of the availability of funds. Business Standard has reviewed Sebi’s note to fund houses on the issue.
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According to the norms, on purchase of units in income or debt-oriented schemes, other than liquid schemes, with an amount equal to or over Rs 1 crore, irrespective of the time of receipt of application, the closing NAV of the day on which the funds are received by the fund house, is applicable. If the investment is under Rs 1 crore, investors get the NAV of the day on which the application was made. Sebi found certain entities were exploiting regulatory loopholes to get the same day’s NAV by splitting their investments.
Income or debt schemes invest in fixed-income securities such as bonds, corporate debentures, government securities and money market instruments and aim to provide regular and steady income to investors.
The regulator wants fund houses to strengthen their systems to detect such malpractices and ensure all multiple applications for investment in a particular scheme on a particular date be cumulated according to distinct permanent account numbers for calculating the amount equal to or more than Rs 1 crore.
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Sebi has asked fund houses to get their systems reviewed by an independent auditor from the time the present debt NAV norms came into force, that is, from November 26, 2010. They are required to submit the auditor’s confirmation to Sebi that systems have been put in place to comply with norms. They will also have to report all non-compliances.
The modus operandi is simple. Say, an investor wants to put Rs 3 crore in a debt scheme. If he puts the entire sum through a single application, he will get the NAV of the day on which the fund house receives the money. It takes two-three days for a fund house to receive the money through cheques. Instead, if the investor splits his investments in four applications of, say, Rs 95 lakh, Rs 90 lakh, Rs 85 lakh and Rs 30 lakh on the same day, he will get the NAV of that day itself.
In February, Business Standard had reported that Sebi was not happy with this practice and had expressed its displeasure.
(Also Read: Manipulation of NAV norms in debt schemes miffs Sebi)