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Protecting The Investor

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When the Securities and Exchange Board of India (Sebi) banned entry loads in June 2009, it heralded a new era for the mutual fund industry. Here are the key changes, which impact the industry as a whole:

Exposure To Derivatives: With effect from 1 October 2010, Sebi has barred funds from writing Options (and selling) and buying instruments with embedded Options. Mutual funds have been told to have cumulative gross exposure through equity, debt and derivative positions of not more than 100 per cent of the scheme's asset size. Also, mutual funds should restrict the Options exposure to 20 per cent of the scheme's net assets. 

Debt And Money Market Valuation: All money market and debt securities, including floating rate securities, with residual maturity of up to 91 days, will be valued at the weighted average price at which they are traded on the valuation day. When such securities are not traded, they shall be valued on the amortisation basis. Sebi wants to preserve the liquid nature of the schemes and protect them from mismatches or pressure in the case of redemptions. 

Speedy Dividend Dispatch: Asset management companies (AMCs) must dispatch dividend warrants within 30 days of the declaration of the dividend. If not, they will have to pay 15 per cent interest per annum to the unit holder. No NOC For Changing Distributor: AMCs have been asked not to insist on the investor procuring an NOC (no objection certificate) from the existing distributor when switching distributors. 
Investor Complaints: AMCs must disclose the details of investor complaints on their website, the Association of Mutual Funds in India (AMFI) website, and their annual reports. 

All Investors At The Same Level: To stop AMCs from conceding too much to large institutional investors at the expense of small investors, uniform exit loads across all categories of investors have been levied.

Reducing NFO Period And Extending ASBA: New fund offering (NFO) limit has been brought down from 30-45 days to 15 days, barring ELSS (equity-linked saving schemes). AMCs should allot units or refund money and dispatch statement of accounts within five business days from the closure of the NFO. They should also provide applications supported by blocked amount (ASBA) to mutual fund investors of NFOs launched after 1 July 2010. 

Unit Premium Reserve: Unit premium reserve, which is part of the sales price of units that is not attributable to realised gains, can no longer be used to pay dividend. 

Transacting On Stock Exchanges: To end the dominance of existing distributors in sale of mutual funds; mutual fund units are permitted to be transacted through registered stock brokers of recognised stock exchanges.

No Third-Party Cheques: AMCs can no longer accept third-party payments, barring a few exceptions. 

Maintaining Unit-holders Documents: AMCs should ensure that distributors submit all investor-related documents to them. And they should hold back commissions / fees of distributors who don't furnish the details.

 Commission Disclosure: Distributors must disclose all commissions paid to them by competing mutual fund schemes. This curbs mis-selling by distributors.

 Certification Programme: Since 1 June 2010, the National Institute of Securities Markets (NISM), and not AMFI, is conducting certification examination for distributors and agents and those employed in the sale of mutual funds. 

Curb on Liquid Funds to Ensure Fair Play: The new rules ensure investors can't get their units allotted till their money actually reaches the fund. This is to check those investors who made it a practice of getting an extra day's return from their investments in such funds. 

The author is CEO of Value Research

(This story was published in Businessworld Issue Dated 28-03-2011)