You won’t have to wait forever to get your first account statement and units allotted once you have invested in a new fund offer (NFO) of a mutual fund (MF) scheme. The Securities and Exchange Board of India (Sebi) announced this, along with a few other key rules, in a circular issued on 15 March. Here’s what they mean for you.
New fund offers’ duration
All NFOs, except equity-linked saving schemes, will now be open for a maximum of 15 days, down from 30 days for open-ended funds and 45 days for closed-end schemes. Once the NFO closes, your fund will have to allot units and dispatch the account statements within five days, down from 30 days earlier.
While this move is good for investors, some fund managers are concerned. “A 5-day period looks tight. It will be an operational challenge to meet this deadline because to get all the forms, cheques and process from all over India will be difficult in these five days,” says Rajan Krishnan, chief executive officer, Baroda Pioneer Asset Management Co. Ltd.
Asba for MF investors
Asba, or Applications Supported by Blocked Amount, is a payment mechanism initiated by Sebi in July 2008 for those investing in initial public offers or rights issue. Under this, the money that you set aside for your application does not leave your bank account till the shares are allotted to you. As a result, your money keeps earning interest, though the funds are frozen and you can’t use them. Also, it negates the need of a refund if shares don't get allotted to you. Sebi has now extended this facility to MF investors.
Though Asba means little for MF investors because you always get 100% units allotted, it protects your money from market vagaries since Sebi also mandates NFOs to now invest your proceeds only after the NFO closes and allot units within five days after that. Both Asba and the new NFO time frame will be applicable for NFOs launched after 1 July.
In December 2008, when Srinivas Vadlamani, former chief financial officer, and B. Ramalinga Raju, founder and former chairman of Satyam Computer Services Ltd, met fund managers and analysts on a conference call to explain the rationale of acquiring 100% stake in Maytas Properties Ltd and 51% share in Maytas Infrastructure Ltd for $1.6 billion, all hell broke loose. While Satyam Computer Services was into information technology, Maytas Properties was into real estate and Maytas Infrastructure into infrastructure. Moreover, both were owned by Raju’s children.
Fund managers vociferously opposed the proposed takeover. The reporter has the transcript of that call. They expressed their shock, called the transaction an example of “third grade corporate governance practices” and expressed concerns that this could possibly lead to a scenario where foreign investors would desert Indian companies. Fund managers and analysts forced Satyam to abandon the plans, which would have cost the minority shareholders of Satyam dearly. A few days later, Raju admitted to fraud. Although investors of Satyam lost eventually, it was probably one of the few instances in public light where fund managers and equity analysts protected the right of the minority shareholders and put pressure on a corrupt management to change course.
Sebi now wants MFs to be more active in corporate governance. Sebi feels it is appropriate to allow MFs to voice their opinion as they are vehicles for small investors. Sebi has now made it mandatory for funds to disclose whether they voted for or against moves (suggested by companies in which they have invested) such as mergers, demergers, corporate governance issues, appointment and removal of directors. MFs have to disclose it on their website as well as annual report. “As markets mature, institutional activism will definitely rise,” says Jayesh Shroff, fund manager, SBI Funds Management Pvt. Ltd.
Pay dividends from gains
Typically, when funds pay dividends, they are supposed to pay out of their profits or realized gains. For instance, if you invest in a fund at a net asset value (NAV) of Rs12, Rs10 will go to an account called unit capital, assuming the fund’s face value is Rs10. The balance of Rs2 (Rs12 less Rs10) goes into a separate account called unit premium reserve. If this Rs12 goes up to Rs13, the fund can declare a dividend of Re1—its gains.
However, Sebi noted that some fund houses were paying dividends from their unit premium reserve instead of the realized gains. Industry sources claim that some funds used to do this to attract large investors by giving them advance notice in private and then allowing them to book losses (NAV drops after dividend declaration), claim losses and set them off against other gains.
Less commission for FoFs
Life just got tougher for fund of funds (FoFs) that invest their entire corpus in international funds. Typically, FoFs charge a maximum of 0.75% per annum. Out of this, the MF pays agent commission and incurs costs on running the scheme and keeps what is left, which fund houses claim is a pittance. To compensate, FoFs enter into a revenue sharing agreement with international funds in which they invest. The international fund pays a small portion, typically 50-80 basis points, to the Indian FoF, which would then retain this amount as its income.
Sebi has now put a stop to this revenue sharing agreement. Fund houses aren’t too happy as they claim it would now be unprofitable to launch and manage FoFs. “If asset management companies do not make any money, these FoFs may stop. International countries and assets were a good way of diversifying our money,” claims a fund manager of a fund house that has an FoF.
Money Matters take
From streamlining the process of declaring dividends to nudging funds to play an active role in corporate governance, Sebi has done well in making MFs more transparent. Cutting down the allotment time to five days, down from 30 days, is bound to pose a challenge to MFs and it remains to be seen how they respond.