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SEBI Tightens Fund Disclosure

The new circular makes it difficult for fund to get away with vague description of how they will manage money. It lays the ground rule for detailed disclosure before a fund gets in business

The Securities and Exchange Board of India (SEBI) is turning the heat on asset management companies with stricter disclosure norms in offer documents. The market watchdog has now lined up a list of standard observations, which have to be complied with when mutual funds file the draft letter for an initial public offer or revise an existing offer document. While SEBI has added some new regulations, it has also given more teeth to the existing norms. All information in the offer document should be updated 30 days before the launch of the scheme.

More Transparent Operations
1. The offer letter will disclose if the scheme plans to invest in securitised debt coupled with the maximum limit on such investments.

2. The fund house must reveal if it follows any internal guideline vis-à-vis limiting exposure to a particular sector and stocks apart from SEBI's investment restrictions. 3. Apart from the asset allocation under normal circumstances, the mutual fund now has to indicate the extent of gains or losses on the initial pattern before it takes stock and re-balances the portfolio. With most equity funds going astray in the tech bull-run and ending with huge losses, the regulator has thus decided to streamline investment strategies. 4. AMCs have to communicate the nature of assignments of its key personnel in the last 10 years. So far, most fund houses simply disclose the number of years worked and not the type of past experience. 5. SEBI has also cracked the whip in the case of investment decisions. Thus, the offer document must detail the steps followed before picking up a security, the role of the CEO in the process and whether an individual or committee arrives at investment decisions. 6. A mutual fund should reveal how the AMC Board and trustees monitor decisions and performance of schemes. 7. It is now mandatory to mention the relevant benchmark to compare the fund's performance.

Investor Specific Regulations
1. In case the transfer of units is carried in-house, investors must know if the charges are at competitive rates. If charges are higher, the fund house needs to detail the reasons for the same. 2. The offer document should have no clause, which limits the jurisdiction for settlement of claims to a specific place/region. 3. Returns available for periods less than one year for any particular year should be given in absolute terms only and not on annualised basis. The same standard of performance reporting should also be followed in all advertisements.

Will it help?
There is a very thin line that divides regulation and infringement on a mutual fund's operational freedom. Thus, apart from a few other changes that make mutual funds more transparent, there is little SEBI can do. It is here that investors have to be more vigilant and regularly track performance and portfolios for any deviation from the set charter. While you cannot run your own business without knowledge of your industry, you can't run your own money without knowledge of how the funds work and what they offer. Unfortunately, fund investors are still casual about their investment goals and do not pay adequate attention to the offer documents – forget the fine print; even the bold headlines are seldom read. No wonder, some investors end up with losses since they falter at the starting line!