Mutual fund rationalisation takes off ASHISH GUPTA
Continuing its efforts to protect the interests of investors in securities and to promote the development of, and to regulate the securities market, Securities and Exchange Board of India (SEBI) has revised the guidelines for rationalisation of initial issue expenses and dividend distribution procedures for mutual funds.
SEBI has accordingly amended SEBI (Mutual Funds) Regulations, 1996 in April. This has been done to clarify the expense structure in SEBI (Mutual Funds) Regulations, 1996 with greater precision and to introduce uniform practices in procedures for dividend distribution by the mutual funds.
The amended provisions include:
Initial issue expenses
The initial issue expenses will be permitted for closed-ended schemes only. Open-ended schemes should meet the sales, marketing and other such expenses connected with sales and distribution of schemes from the entry load and not through initial issue expenses. Since closed-ended schemes are allowed to charge initial issue expenses, they will not charge entry load. In close-ended schemes where initial issue expenses are amortised, for an investor exiting the scheme before amortisation is completed, AMC will redeem the units only after recovering the balance proportionate to unamortised issue expenses. Conversion of a close-ended scheme or interval scheme to open-ended scheme/or issue of new units should be done only after the balance unamortised amount has been fully recovered from the scheme.
Dividend distribution
SEBI (Mutual Funds) Regulations, 1996 permit the mutual funds to distribute returns including dividend. It had been noted that mutual funds were following different procedures for dividend distribution. To introduce uniform practices in procedure for dividend distribution by the mutual funds and for development of the mutual funds industry, these guidelines have been issued: Unlisted schemes Quantum of dividend and the record date should be fixed by the trustees in their meeting. Dividend so decided should be paid, subject to availability of distributable surplus. Record date should be the date which will be considered for the purpose of determining the eligibility of investors whose names appear on the register of unit holders for receiving dividends. Further, the NAV should be adjusted to the extent of dividend distribution and statutory levy, if any, at the close of business hours on record date. Within one calendar day of the decision by the trustees, AMC should issue notice to the public communicating the decision including the record date. The record date should be five calendar days from the date of issue of notice. Such notice should be published in one English daily newspaper having nationwide circulation as well as in a regional newspaper where the head office of the mutual fund is situated. The notice should, in font size 10, bold, categorically state that pursuant to payment of dividend, the NAV of the scheme would fall to the extent of payout and statutory levy (if applicable). Before the issue of such notice, no communication indicating the probable date of dividend declaration in any manner whatsoever may be issued by any mutual fund or distributors of its products.
Liquid and debt schemes
The requirement of giving notice should not be compulsory for scheme/plan/option having frequency of dividend distribution from daily upto monthly dividend provided that there is a disclosure to that effect in the offer document. Listed schemes For declaration of dividend, listed schemes/plans should continue to follow the requirements stipulated in the listing agreement. All advertisements in any media, containing proposed dividend should, in the same font as dividend figure (in percentage or in absolute terms), disclose immediately below the dividend figure that the NAV of the scheme, pursuant to payment of dividend would fall to the extent of payout and statutory levy (if applicable). The guidelines on dividend distribution procedures are applicable to all mutual fund schemes/plans which intend to declare dividends irrespective of their dates. Click here for Indian stock market tips