FMPs, close-ended plans set to flood mkt

Sebi proposal prompts fund houses to line up products.

The domestic mutual fund industry is set to change gears with several fund houses lining up Fixed Maturity Plans (FMPs) and close-ended income schemes, which invest the funds collected in debt and money market instruments, if the Securities and Exchange Board of India's (Sebi's) draft proposal on fast tracking mutual fund products comes into force.

In December 2007 alone, around seven offer documents for FMPs and close-ended income schemes were filed. In 2007, a total of 763 of these schemes were launched. The fund industry is upbeat about this proposal since it is likely to reduce the time taken by the regulator to approve these schemes.

Currently, Sebi takes anywhere between 30-45 days to approve FMPs and close-ended income schemes, according to a senior official of a mutual fund.

So, to ensure smooth pipeline of launches, fund houses obtain a series of approvals from the regulator and launch their schemes in the next six months or on a continuous basis, if there is demand from investors.

"We do not want to risk running short of approvals for FMPs since we launch them as and when there is appetite in the market. They are standard schemes and there are unlikely to be great changes in the investment mandate. So, if such a proposal were to become a reality, it would simplify the procedure," said Parijat Agrawal, Head, Fixed Income of SBI Mutual Fund.

According to the new draft proposal, mutual fund houses are required to place a final offer document (hard as well as soft copy), due diligence certificate from trustees with additional due diligence certificate from the compliance committee, comprising CEO of the AMC, compliance head and fund manager, along with a copy of receipt of the filing fee.

This document is then uploaded on the Sebi website. After receiving a written confirmation of the offer document from Sebi, the AMC would be free to launch the scheme.

Most developed markets have similar models. In Australia, for instance, only the prospectus is needed to be lodged with the Australian Securities and Investments Commissions, and the onus is on the product provider to ensure compliance.

The regulator merely retains the power to require amendments to product disclosure statements (PDS) and to place 'stop order' on any PDS, meaning it is incapable of accepting new investments.

In the US, once the AMC files the draft offer document, the American Securities and Exchange Commission just vets it. In Korea, the mutual fund industry self regulatory organisation goes through the proposed offer documents and after the approval, it is filed with the regulator and launched soon after.

"It is a step in the right direction and similar to what is prevalent in the financial services industry in a host of other countries. The File and Use procedure (as it is called) will reduce the time for the product to hit the market. Going forward, this procedure should also be applied to equity products," said Mukul Gupta, CEO, Birla Sun life Mutual fund.

Assets under management (AUMs) under debt constitute a significant portion of the total AUMs of mutual funds. As on November 30, debt schemes constituted 59.06 per cent of the total AUMs, according to fund tracking firm Value Research.