BackSpurt in dividend, bonus plan demand under Sebi scrutiny: Amfi
Amfi chief HN Sinor's email pointed to the sudden spurt in demand for dividend or bonus options of funds post the change in tax treatment for debt funds announced in the budget
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Mumbai: Industry body Association of Mutual Funds of India (Amfi) has written to chief executive officers of mutual funds warning them about the fallout of a sudden increase in demand for dividend or bonus options of funds that, it claims, has caught the attention of the Securities and Exchange Board of India (Sebi).
Amfi chief H.N. Sinor’s email dated 22 August came in the wake of criticism of the practice called bonus-stripping, highlighted by Mint on 12 August. A copy of the email has been reviewed by Mint.
The email pointed to the sudden spurt in demand for dividend or bonus options of funds post the change in tax treatment for debt funds announced in the budget. A bonus-stripping proposition in such funds is no longer viable and the focus has shifted to low-risk equity products like arbitrage funds for this purpose. An arbitrage fund is technically an equity-oriented fund. But rather than investing only in equity stocks in the cash market, its objective is to take advantage of price differentials between the cash and the derivatives market.
Bonus stripping is the practice of investors buying units of a mutual fund to take part in a bonus issue, which allows them to book losses on the original value invested and then set it off against gains from other sources.
Moreover, “stripping" is not just about paying out the incremental return in the fund, but rather about paying out previously accumulated value, which has been added over the years. This again is on blurred regulatory lines: letting a new investor benefit from bonus stripping due to historical value of the fund seems unfair.
On 12 August 2014, Mint had reported that JM Arbitrage Fund collected roughly ₹ 5,500 crore in July 2014, a whopping 80% of the fund house’s total assets under management (prior to that) in JM Arbitrage Advantage fund with the promise of bonus stripping. While the fund house denied it, some people in the mutual fund industry say this money was raised with the intention of giving some investors the advantage of bonus stripping.
The email from Amfi adds that besides the adverse media attention, the rise in demand for bonus/dividend options has also caught Sebi’s eye.
In response to a query from Mint on whether Sebi was looking into the approvals of bonus plans, the regulator clarified that as per its circular dated 15 December 2009, plans that are consistent with the characteristics of the scheme may be launched as additional plans approved by the asset management company’s board and trustees, meaning adding a bonus option to an existing scheme does not require prior approval from Sebi.
The practice of announcing dividends and bonuses in schemes is above ground; the concern is over providing selective information about this in advance to potential investors and distributors. Sinor’s email said the issue was discussed in a recent Amfi board meeting where members raised concerns about these developments.
The crux of the email is a request to all Amfi members to follow the regulation in letter and spirit and adhere to the Amfi code of conduct, which does not advocate prior intimation to investors about such products.
Karthik Jhaveri, founder and director, Transcend Consulting India, a consulting firm which focuses on financial and wealth planning, said, “The mail is good news and it matters because such schemes open up a Pandora’s box of mis-selling by certain distributors and kill the market for genuine investment. One such event can give the entire industry a bad name."
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