From October 2011, when you fill out an application form to buy mutual fund (MF) units, you will get a choice to opt for units in the dematerialized form right there. As of now, you can convert existing units into demat form.
In a circular issued on 19 May, the capital market regulator, Securities and Exchange Board of India (Sebi), has made it mandatory for all fund houses to provide the demat option in the application forms.
The current scenario
All closed-end MFs already give the choice to unitholders to opt for units in demat form, thanks to a Sebi mandate issued in December 2008. After the credit crisis in September 2008 that led to some major global banks going under and the subsequent rush on redemptions from MFs in India, many closed-end funds had to sell their existing securities at throwaway prices to meet panic redemptions.
Existing investors suffered and, hence, Sebi later ruled that units of closed-end funds will be mandatorily listed on the stock exchanges. Hence, such units were offered in demat form. But open-ended scheme’s unitholders did not really have an option to subscribe units in demat form. Their only recourse was to subscribe units in the original form (reflected by way of account certificates) and later convert them into demat units.
Sebi had mandated that with effect from August 2010 all MF units can be dematerialized by submitting a request for dematerialization to the fund house.
As per the latest Sebi’s circular, all MFs would need to procure International Securities Identification Number (ISIN) of each of their schemes and quote the same in all account statements. Investors wanting to dematerialize their units anytime in future will then need to quote the ISIN of their respective schemes, when submitting their dematerialization request. But will MFs incur a cost in getting their forms reprinted, to accommodate this tiny addition? “No”, said a fund manager of a bank-sponsored fund house who did not want to be named. Typically, these days fund houses do not want to be quoted on matters concerning Sebi. “Hopefully by October, we would have exhausted our current set of forms, so printing of new set of forms will anyway happen,” he added.
Giving impetus to the stock exchange platform
Ever since Sebi allowed funds to be sold and bought on the stock exchanges in the latter half of 2009, these platforms haven’t really taken off. Subsequent enhancements to the exchange mechanism, too, haven’t really encouraged investors to switch to the stock exchange platform.
According to a Mint Money analysis, less than 0.01% of the total MF sales on a monthly basis happen through the two stock exchanges—the Bombay Stock Exchange and the National Stock Exchange. Says Rajeev Thakkar, chief executive officer, Parag Parikh Financial Advisory Services Ltd: “One of the main problems is that Sebi is trying to activate and enhance the exchange platforms when people sitting on broker terminals (brokers) aren’t willing to sell—or they don’t track—MFs since it is not their focus area. On the other hand, many MF agents don’t have a stock exchange membership, hence they can’t transact on the exchange platforms.”
Only time will tell whether investors will actively opt for dematerialization after October. Watch this space for updates.