The Securities and Exchange Board of India (Sebi) has done the right thing in not allowing investors to make early exits from close-ended schemes. This will prevent a repeat of the recent crisis in the mutual funds industry when fund managers managing Fixed Maturity Plans (FMPs) faced redemption pressures and were forced to sell paper at unremunerative prices. It wasn’t that the corporate paper that the FMP schemes had invested in were of high risk or poor quality, they were simply less liquid in an already tight money market. Selling paper at less than their correct value would definitely have hurt the interests of the remaining unit holders. The problem would not have arisen had investors been forced to stay put till the scheme matured. For their part, investors who put money into FMPs are looking for a zero price risk and also a certain assured return which is higher than that available on fixed deposits. These attributes, together with the tax benefits (through single or double indexation, depending on the tenure of the scheme), are what make the product so attractive. But if they want to enjoy all these benefits they need to sacrifice the facility of being able to withdraw early from the scheme by paying a penalty. They cannot be allowed to hurt the net asset value (NAV) and returns for the remaining unit holders. In any case, all such schemes will now be listed and if investors need the funds urgently, they have the option of selling the units in the market. Even if they receive less flows into these schemes, mutual funds will surely think themselves better off because fund managers will be assured of a fixed corpus. Sebi has now said that fund managers should invest in instruments that match the maturity profile of the scheme. Essentially the idea is to avoid an asset-liability mismatch, which makes perfect sense. With an assured corpus, there can be no excuse for not being able to ensure that the portfolio matures just ahead of the redemption date.
In another announcement, Sebi has extended the validity of approvals given to companies making Initial Public Offerings (IPOs) from three months to one year. This makes sense provided the numbers relating to the financial performance of the company are compulsorily updated before the issue finally hits the market. It would spare companies the trouble of filing the prospectus all over again. On the matter of insider trading, Sebi has broadened the scope of the definition to include any person connected with a company, whether in the past or present, and is a recipient of price-sensitive information. Moreover, no insider can enter into an opposing trade within six months of the initial trade having taken place. While the stricter rules are welcome, Sebi’s track record in unearthing cases of insider trading and bringing the culprits to book, has not been anything to write home about. It is hard to believe that insider trading is less rampant than it was, say, five or 10 years back. So far, Mr Bhave has done a good job as chairman; in a quiet way, he has made changes which will make a difference. Some success in detecting insider trading will convince the market that the regulator is vigilant.
