The Canstar repurchase controversy has taken a fresh twist, with the Reserve Bank of India set to discuss the issue with Canara Bank, the sponsor of Canbank Mutual Fund. RBIs decision comes after a high-level meeting with the Securities & Exchange Board of India.
Sebi sources said the matter was now at RBIs end and the regulator was waiting for the apex bank to take up the matter with Canara Bank. The issue, which is crucial in the light of protection for unit holders of mutual funds, has got muddied further with the bank making it clear that it has been legally advised that it has no liability on the Canstar issue, and the banks auditors unable to express an opinion on the matter.
However, Sebi says letting Canara Bank and Canstar off the hook would send wrong signals to the entire mutual funds industry and could set a dangerous precedent. Other mutual funds may want the same concession, a top Sebi official said. The mutual fund had promised repurchase at a price of Rs 23 per unit. However, with a drop in its net asset value, the fund would have to shell out a large amount of money to honour the commitment, particularly since the outstanding corpus is around Rs 500 crore.
Sebi says action against the mutual fund will further hurt the unit holders and action should be taken against Canara Bank, which is the sponsor of the fund and has to shoulder the responsibility. But Canara Bank is unwilling to shoulder the huge payout since it would affect its financials.
For Sebi, the Canstar controversy, hanging fire for several months, comes as a test, since it involves a public sector bank and another regulator, RBI. The involvement of a public sector bank also drags the finance ministry into the picture.
Canstar was launched in 1990, when Sebi did not have its own statutory status.
The scheme is, therefore, legally outside the purview of Sebi, but the regulator feels it has a mandate to act in the interest of unit-holders.
Sebi action against Canara Bank could result in the bank being barred from accessing the capital market., which would, in turn, be disastrous for the banking sector.
