iii.

Mutual funds

Emerging trends and innovations

The mutual fund industry has witnessed several innovations during the year. A novel feature in the form of limited cheque writing facility has been introduced by one of the funds. Its asset management company (AMC) through an arrangement with a Bank, allows the unitholders to issue cheques against a savings account with the Bank.

Each unitholder is allowed to issue cheques up to a specified limit. To enhance service to investors, one fund has instituted a toll-free inquiry facility enabling investors to access information about the fund without any charges.

The year also witnessed the launch of sector funds targeting sectors such as information technology, pharmaceutical, brand value and fast moving consumer goods. Dedicated gilt fund envisaging 100% investment in government securities was launched making the gilt market accessible to small investors. Another innovative product was to invest solely in dematerialised securities and exchange of any security in dematerialised segment, instead of cash, for the units of the scheme.

A meeting with the trustees of various mutual funds was held to get their feedback on the recommendations of the P.K. Kaul Committee regarding the discharge of the trustees' responsibilities of the trustees. The recommendations of the Committee would be implemented soon.

The Committee appointed for framing the guidelines for mutual funds to invest in overseas markets submitted its Report. The recommendations of the Committee have been taken up for discussion with the Reserve Bank of India and the Government for implementation.

During the year, meetings were held with the Association of Mutual Funds of India (AMFI) periodically to discuss regulatory and operational issues. This has helped in establishing a meaningful dialogue with the industry and taking decisions.

The Standard Offer Document for filing the scheme details came into force on April 1, 1998. Also, from this date, it became mandatory for each application form to be accompanied by a memorandum containing key information i.e. abridged offer document. These documents have strengthened disclosure standards in mutual funds industry enabling investors to take informed investment decisions.

The SEBI also directed the mutual funds who had launched assured return schemes to meet their commitments in case there were shortfalls, and as a result sponsors of these mutual funds, who were to meet the commitment infused additional resources to the tune of Rs 1300 crore in the funds to meet the short fall.

Securities lending by mutual funds

Mutual funds were allowed to participate in securities lending subject to certain disclosures and reporting requirements. The guidelines issued lay down the disclosure requirements in the offer documents which include intention to lend the securities belonging to the scheme, the exposure limit regarding securities lending both for the scheme as well as for a single intermediary and the risks associated with stock-lending transactions.

The specifications regarding the valuation of the collateral have been prescribed in the guidelines to minimize the risk involved in securities lending transactions. To ensure adequate checks and balances regarding the securities lending transactions, the requirement of reporting to trustees and SEBI have been stipulated.

Participation by mutual funds in derivative trading

The Report on the Committee of Derivatives had recommended the participation by mutual funds in derivative trading for the purposes of hedging and portfolio balancing. The Securities and Exchange Board of India (Mutual Funds) Regulations 1996, were amended to allow the mutual funds to participate in derivatives trading whenever this is introduced.

Collective investment schemes

The Government of India, vide its press release dated November 18, 1997, decided that an appropriate regulatory framework for regulating schemes through which instruments like agro bonds, plantation bonds etc. are issued, has to be put in place. The government decided that the schemes through which such instruments are issued would be treated as "Collective Investment Schemes" coming under the provisions of the SEBI Act. Accordingly, SEBI vide its press release dated November 23, 1997 and public notice dated December 18, 1997, notified the provisions of section 12(1)(B) of the SEBI Act which prohibits any person from sponsoring or causing to be sponsored any Collective Investment Scheme without obtaining a certificate of registration from the Board in accordance with the regulations.

The proviso to section 12(1)B provides that till regulations are notified all Collective investment schemes which are operating, can continue with their operations till the regulations are notified. The existing schemes, which desired to take the benefit of this proviso and continue operations were directed, by the SEBI, to submit information about their schemes with offices of SEBI. These schemes were further directed to comply with code of advertisement as prescribed in the SEBI guidelines on disclosure and investor protection. Till date the SEBI has received information from 654 entities who have reportedly raised appox. Rs.2589 crore.

In order to frame the regulations for collective investment schemes, a committee was appointed under the Chairmanship of Dr. S.A. Dave. The committee comprised representations from various ministries like the Ministry of Finance, Ministry of Agriculture, Ministry of Forestry, Regulatory bodies like Reserve Bank of India and Department of Company Affairs, professional representation from Institute of Chartered Accountants of India, Association of Merchant Bankers and Mutual Funds, Investor Association and representation from the Industry.

The committee in its interim recommendation desired that existing collective investment schemes should be allowed to mobilise further funds only if they obtain a rating from any of the recognised credit rating agencies. Accordingly, after taking into consideration the views of the members of the Dave Committee as well as the interest of the investors, SEBI, in exercise of the powers under Sec. 11B read with the proviso to Section 12(1)B of the SEBI Act, 1992 directed on February24,1998, that no existing scheme shall mobilise any money from the public or from the investors under the existing schemes unless the

instruments of such schemes carry a rating from any of the recognised credit rating agencies. Sixty six schemes have reported to have obtained a credit rating. All the ratings obtained are below investment grade.

The Dave Committee has submitted its report along with the Draft Regulations to SEBI. The major features of the report are presented in Box 1.6.

Box 1.6: Major Recommendations of the Dave Committee Definition: "Collective investment scheme" means any scheme or arrangement:i. with respect to property of any description, the purpose of which is to enable the investors to participate in the arrangements by way of contributions and to receive profits or income or produce arising from the management of such property or investments made thereof; and the contributions of investors, by whatever name they are called, are pooled, and are utilised solely for the purposes of the scheme or the arrangement; and the property or such contributions is managed as a whole on behalf of the investors, whether or not such properties or contributions and the investments made thereof are evidenced by identifiable properties or otherwise; and the investors do not have day to day control over the management/operation of the property/scheme.

ii. iii.

iv.

I. Eligibility for floating collective investment schemes Collective investment schemes can be floated only by public companies registered under the provisions of the Companies Act, 1956.

The company floating CIS shall have to seek registration with SEBI as collective investment management company.

A minimum net worth requirement of Rs. 5 Crore has been recommended for Collective Investment Management Companies. These companies would further have to demonstrate that they have the capacity to carry out the duties of a Collective Investment Management Company efficiently, honestly and fairly.

II. Structure and constitution of collective investment schemes A two tier structure for constitution of collective investment schemes has been recommended. All collective Investment Schemes shall be constituted in the form of a trust and the instrument of the trust shall be in the form of a deed duly approved by SEBI and executed by the Collective Investment Management Company in favour of the trustee.

Only trustees approved by SEBI shall be permitted to act as trustees to Collective Investment Schemes.

III. Scheme features Every Scheme shall have to file offer documents with SEBI containing adequate disclosures to enable the investors to take informed investment decisions.

Each scheme shall have to obtain a rating from a recognised credit rating agencies. The projects being undertaken must also be appraised by an empanelled appraising agency.

The schemes are prohibited from guaranteeing assured returns. Indicative returns, if any, provided by the scheme shall be based on the projections in the appraisal report.

Advertisements in respect of every scheme shall have to conform to the SEBIs advertisement code.

No scheme shall be kept open for subscription for a period of more than 180 days. The schemes shall be close ended in nature. The schemes must indicate the minimum and maximum amount proposed to be raised over this period. The duration of the schemes should be for a minimum period of 3 years.

Compulsory Insurance over the assets of the scheme and personal indemnity cover for the

managers to the scheme has been recommended.

Units issued under the collective investment schemes are to be compulsorily listed on recognised stock exchanges.

The committee has suggested accounting/valuation norms which shall have to be followed by collective investment schemes.

IV. Existing schemes A period of three years has been given to the existing schemes to restructure their operations and achieve the capital adequacy norms.

During the transition, no new schemes can be launched by these companies unless they conform to the new regulations. Existing schemes can continue to mobilise further funds provided they meet the criterion laid down under the regulations .

Existing Schemes, which are not desirous of coming under the regulatory purview, may wind up operations and refund investors funds or merge with other schemes so they satisfy the regulations. They would be given reasonable time to restructure themselves, grow larger or wind up.

V. Legislative changes/ other recommendations to the government Collective Investment Management schemes registered with SEBI should be exempted from the provisions of the land ceiling acts or alternatively the government may consider granting the Industry status to these schemes.

Suitable clarification from the government on the taxation issues involving income earned by the investors from investment in these schemes.

In order to promote long term investment in plantations, the Government may consider to grant suitable tax deductions on the lines of those given to Infrastructure Projects should be considered.

Printer Friendly page

Email this page

Disclaimer | Acknowledgement
All text and media on these pages are Copyright, Securities and Exchange Board of India. All rights reserved