An asset management company (AMC) can fix its own target minimum subscription and either retain the oversubscription or refund the entire amount of oversubscription at its discretion:
If the AMC retains oversubscription, all the applicants applying for upto 5,000 units are to be given priority.
If a close-ended scheme (CES) was unable to collect Rs 20 crore and an open-ended scheme (OES) unable to collect Rs 50 crore), the entire amount collected was required to be refunded:
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Fund managers were always tense whenever a scheme was launched because of this. Many of them used to go around with a begging bowl. Sometimes, you scratch my back and I scratch yours type of deals were struck with friends to reach the target. Immediately after the closure, most of these friends used to withdraw their funds. This had made a mockery of the regulation.
Schemes can borrow upto 20 per cent of net assets for a maximum period of six months only for the express purpose of meeting temporary liquidity needs as a result of repurchase, redemption or payment of interest to unit holders. The mutual fund shall not advance any loans for any purpose:
his is yet another facility that would give relief to the fund manager. Previously, he was required to keep a sizeable portion of the corpus in low-yield liquid avenues to cater to sudden large-scale demands for repurchases from across the length and breadth of the country, thereby sacrificing good investment opportunities.
The AMC may issue an account statement in lieu of unit certificates within six weeks from the date of allotment for both types of schemes:
If an investor wants a certificate, it shall be issued to him within six weeks of receipt of the request.
The account statement is an excellent concept that protects the investor against loss in transit (which has become a lucrative opportunity for some postmen and bank officials). The statement also helps cover contigencies like losses due to fire, floods as well as forgetfulness. Sebi should have insisted on giving only the account statements and eliminated the certificates altogether. Giving some investors certificates and others account statements has the potential to create problems.
Regulatory restrictions
Every MF shall buy and sell securities on the basis of deliveries and shall in all cases of purchases take delivery and in all cases of sale deliver the securities and shall in no case put itself in a position whereby it has to make short sale or carry forward transaction or engage in badla finance.
Every MF shall get the securities purchased or transferred in the name of the scheme concerned, wherever investments are intended to be of a long-term nature:
Earlier, the scheme required all purchases to be transferred in the name of the scheme. This gave unscrupulous companies the opportunity to take their time in effecting the transfers causing liquidity problems. This is one of the reasons for the slump in the market.
No guaranteed returns shall be offered by a scheme unless these are fully guaranteed by the sponsor or the AMC:
All MFs can guarantee returns upto five years at a time, provided at least 85 per cent of the portfolio is held in fixed income securities with at least `AA rating and for which interest rates are assured.
Units shall be freely transferable by act of parties (trustee company or board) or by operation of law, unless otherwise restricted or prohibited under the scheme (e.g. equity linked tax saving schemes, ELTSS or units issued under section 54EA/EB):
The transfer shall be effected within 30 days, unless the units are with any of the depositories, in which case the transfer shall be in accordance with the Sebi (Depositories and Participants) regulations, 1996.
Investors applying for repurchase should receive the proceeds within 10 working days:
Almost all the MFs have started paying the proceeds within five working days!
The limit on the minimum net worth of AMC has been increased from Rs 5 crore to Rs 10 crore:
This will weed out the weaklings.
No scheme other than ELTSS shall be open for subscription for more than 45 days:
This has enabled Sebi to ban prizes, lotteries and other similar benefits to tempt investors. Sebi has also prohibited paying agency commissions to individuals on condition that they become investors and collects subscriptions from others. Offering units at a differential price to any one class of unitholders is not allowed. Only insurance-linked schemes where the benefit of insurance against accident is available to all classes of investors will be allowed.
In their zeal to ban such lures (I do not understand why the accident insurance has been made an exception), Sebi made the mistake of banning early bird incentives! It would slaughter ELTSS if this is denied to them. Now, Sebi has conceded to give the nod only if any other word or phrase other than `early bird incentive is used. This is ridiculous indeed.
No change in the fundamental attributes of any scheme or the trustee fees or expenses payable or any other change which would modify the scheme or affect the interest of the unit holders including rollover of a CES at the end of its term or conversion of a CES into an OES, shall be carried out, unless (i) the offer document contains such a provision or (ii) consent of not less than 75 per cent of the unit holders is obtained and unit holders who do not give their consent are allowed to redeem their holdings.
Once these Sebi regulations take effect, I do not think any taxpayer will turn to any other investment avenue, other than open-ended pure-growth schemes of MFs. These are also good for a non-taxpayer since these are unmatched in terms of attractive rate of interest with high safety and excellent liquidity. The pure-growth schemes provide an opportunity to bypass future taxes, so much so that there is no need for anyone to create unaccounted money any longer. I strongly feel that such open-ended schemes will shape up as the only investment avenue for a small investor. All these regulations will definitely go a long way in rejuvenating the MF industry which was allowed to become sick. I only hope it is not too late. This value addition will prompt investors to invest in the scheme whenever they have investible funds. There will no longer be any need for them to go on random fishing expeditions.
Once these Sebi regulations take effect, I do not think any taxpayer will turn to any other investment avenue, other than open-ended pure-growth schemes of mutual funds.