Sebi guidelines likely to halt new MF offerings

The Securities and Exchange Board of India's (Sebi) norms on initial issue expenses will limit open-ended fund launches, as funds will no longer be in a position to offer hefty commissions to distributors, fund officials said on Wednesday.

The market regulator on Tuesday had said open-ended funds will have to bear sales, marketing and other expenses from the entry load as they no longer will be allowed to charge initial issues expenses.

Only close-ended funds will be permitted to charge initial issue expenses and they should not charge any entry load, Sebi said.

"Obviously, there will be changes in the industry. NFOs (new fund offers) will no longer be attractive," Sethuram Iyer, chief investment officer, SBI Mutual Fund, said on the new norms.

He said mutual funds would not be in a position to hike entry loads in new fund offer as "any hike above 2.25 per cent will dampen the returns of the scheme." For a long time, industry officials and regulators were debating over the amortisation of initial issue expenses, so as to protect the interest of long-term investors.

Earlier, all schemes were allowed to amortise the initial issue expenses to the extent of 6 per cent over a five-year period. This used to impact the interest of long-term investors who had to bear these expenses when short-term investors exited from schemes.

T P Raman, managing director of Sundaram Mutual, said, "Entry load can be hiked only to the extent the market can bear. There can be entry load of 2.25-3 per cent, but not more than that. Henceforth, curtailing the expenses will be important and expenses in new funds will come down significantly. The asset management company will have to bear the expenses now."

Sanjay Prakash, chief executive officer, HSBC Mutual, also said that asset management companies will have to bear the entry load under open-ended funds.

The new norm comes at a time when a slew of new fund offers are expected to hit the market and papers for many more have been filed with Sebi.

Prakash said, "Going forward, product launches will be limited. Products will be launched only if there is something different to offer."

The new norm will reduce the multiplicity of schemes under various themes, but which are merely diversified equity funds in nature. A section of fund officials said distributors would prefer to sell existing schemes rather than new ones.

Prakash said post-Sebi guidelines, "distributors' commission is likely to come down in new fund offers. People will sell existing schemes".

Until recently, in an attempt to get huge money in their new fund offers, mutual funds used to reward distributors with hefty commissions. As a result, distributors preferred to sell new schemes rather than existing schemes. This also resulted in churning of investments from existing to new schemes.

In March itself, funds had raised Rs 7,178 crore from equity offerings. Out of this, Reliance Equity Fund created history with a record mop-up of Rs 5,759 crore.

In January and February, they collected Rs 8,400 crore and Rs 3,673 crore, respectively.

In order to bring uniformity in dividend distribution across the fund industry, the market regulator also rationalised the dividend distribution norm.

Sebi stipulates that the record date for dividend should be five calendar days from the issue of notice. The market regulator has also prohibited mutual funds from communicating any information on dividend before the issue of notice.

Raman of Sundaram Mutual said, "Any tendency of hot money which was coming and was not helpful for the growth of mutual fund industry will stop now. The uniformity in dividend practices will curb dividend stripping."

Iyer of SBI Mutual also feels new dividend regulations will help in halting dividend stripping.

The market regulator has asked mutual funds to spell out the exact impact on net asset value post dividend distribution.

Prakash of HSBC Mutual feels that new dividend regulations will stop mis-selling by funds as they will have to inform investors that net asset value will come down to the extent of dividend declared.