New SEBI Guidelines for Mutual Funds

The Securities and Exchange Board of India (SEBI) has brought in sweeping changes for the mutual fund industry, the impact of which will be felt on the investor in more ways than one.

First, for New Fund Offers (NFOs)

They will only be open for 15 days. (ELSS funds though will continue to stay open for up to 90 days) It will save investors from a prolonged NFO period and being harangued by advisors and advertisements. The motivation behind the rule seems to be simple; investor can invest anytime, no need to wait for NFO period.

NFOs can only be Invested at the Close of the NFO Period

Earlier, Mutual funds would keep an NFO open for 30 days, and the minute they received their first cheque, the money would be directly invested in the market; creating a skewed accounting for those that entered later since they get a fixed NFO price.

Dividends can now only be Paid out of Actually Realized Gains

Impact: it will reduce both the quantum of dividends announced, and the measures used by MFs to gather investor money using dividend as an incentive to attract new investors.

Equity Mutual funds have been asked to play a more active role in corporate governance of the companies they invest in. This will help mutual funds become more active and not just that, they must reveal, in their annual reports from next year, what they did in each “vote”. 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 reports.

Equity Funds were allowed to charge 1% more as management fees if the funds were “no-load”; but since SEBI has banned entry loads, this extra 1% has also been removed.

SEBI has also asked Mutual Funds to reveal all commission paid to its sponsor or associate companies, employees and their relatives.

Regarding the Fund-of-Fund (FOF) – The market regulator has stated that information documents that Asset Management Companies (AMCs) have been entering into revenue sharing arrangements with offshore funds in respect of investments made on behalf of Fund of Fund schemes create conflict of interest. Henceforth, AMCs shall not enter into any revenue sharing arrangement with the underlying funds in any manner and shall not receive any revenue by whatever means/head from the underlying fund.

These guidelines set by the SEBI will lead to greater transparen-cy for the common investor. SEBI formulates policies and regulates the mutual funds to protect the interest of the investors. With these guide- lines falling in place, it would create better trust and transparency and investable environment that would attract investors with greater faith and confidence.

Conclusion

Mutual funds have become a major vehicle for mobilization of saving particularly from the small and household sectors for investment in the stock market. Mutual funds have responded to this challenge by diversifying through organic growth, innovative new products and building trust with the investors. With greater flexibility in operation, the mutual fund industry is expected to play its desired role to harness savings for economic development, inculcate equity culture, strengthening the capital market.