With an aim to bring in greater transparency in dealings of mutual funds, regulator Sebi today asked them to disclose to investors the commissions paid to their distributors, including payouts in the form of gifts, trips and sponsorships.
Like listed companies, mutual funds (MFs) will also have to disclose the annual salary of those earning Rs 60 lakh or above, and also the ratio of CEO's remuneration to median employee salary.
To ensure MFs are able to carry out their own credit assessment of assets and reduce reliance on credit rating agencies, fund houses are required to have an appropriate policy and system in place to conduct an in-house credit risk assessment before investing in fixed income products.
The fund houses will also have to disclose in the Consolidated Account Statement (CAS), sent to investors, the ratio of the total purchase value and the cost of investment.
In a detailed circular, Sebi further asked MFs to provide additional disclosures in their scheme documents, including the tenure for which a fund manager has been managing the scheme, the portfolio holdings, and also illustrate impact of expense ratio on the scheme's returns.
Under pressure from distributors, some large fund houses were against the idea of additional disclosures, including about total commissions, when the proposal was first discussed at AMFI (Association of Mutual Funds in India). Subsequently, Sebi had to step into the matter in the interest of investors.
The fund house is required to have a dashboard on their website providing performance and key disclosures pertaining to each scheme managed by it. The information should include the scheme's AUM, investment objective, expense ratios, portfolio details and its past performance, among others.
Mutual funds are allowed to deploy new fund offer (NFO) proceeds in CBLO (Collateralized Borrowing And Lending Obligation) before the closure of NFO period. However, AMCs shall not charge any
investment management and advisory fees on funds deployed in CBLOs during the NFO period.
The appreciation received from investment in CBLO will be passed on to investors. Further, in case minimum subscription amount is not garnered by the scheme during the NFO period, the interest earned upon investment will be returned to investors, in proportion of their investments, along with the refund of the subscription amount.
It has also been decided that the Monthly Cumulative Report (MCR) will be submitted to Sebi by third working day of each month, instead of third calendar day of each month.
To promote transparency in remuneration policies so that top executive remuneration is aligned with the interest of investors, fund houses will have to make the disclosures pertaining to a financial year on its website under a separate head 'Remuneration'.
The regulator said salary of all the employees earning Rs 60 lakh or above will have to be disclosed from April 1.
MF's total AAUM (average assets under management), debt AAUM and equity AAUM and rate of growth over the last three years also need to be disclosed.
From October, the fund houses would also have to disclose in the consolidated account statement (CAS) sent to investors the scheme's average total expense ratio for the half-year period, of both direct and regular plan and actual commission paid by fund houses to distributors in the half-year period against the investor's total investment in each scheme.
The commission refers to all direct monetary payments and other payments made in the form of gifts, rewards, trips, event sponsorships etc.
Disclosures related to the fund house's board of directors, other key managerial personnel and the scheme's fund manager also need to be made.
The regulator said soft-dollar arrangements between asset management companies (AMCs) and brokers should be limited to only benefits (like free research report, etc) that are in the interest of investors and the same should be suitably disclosed.
Soft-dollar arrangements refer to an arrangement between fund houses and brokers in which an AMC executes trades through a particular broker and in turn, the broker may provide benefits such as free research, hardware, software or even non-research-related services, among others, to the AMC.
