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SEBI Gets Cracking

We look at the numerous changes brought about by SEBI that will benefit the fund industry as a whole…

The Securities and Exchange Board of India (SEBI), now under the leadership of U K Sinha, has brought about numerous changes that will impact the mutual fund industry. In 2009, the market regulator had banned the entry load which hit distributors and, consequently, inflows into the industry. However, that’s not the only change; there are numerous others which will benefit the fund industry as a whole. We have reproduced them here.

Transaction Charges
The transaction charges are in addition to the existing commissions permissible to the distributors.
• The distributor would be allowed to charge Rs 100 as transaction charge per subscription
• An additional amount of Rs 50 can be charged to a first- time mutual fund investor
• No charge can be made for investments below Rs 10,000
• There would be no charge on transactions other than purchases
• There would be no charge in case of direct transactions with the Mutual Fund
• For systematic investment plans (SIPs), the transaction charges can be recovered in three or four installments


Transparency of Information
• Mutual Funds have to disclose point-to-point returns on a standard investment of Rs 10,000 OR have to disclose growth figures, not compounded annual growth rate (CAGR), in advertisements
• Mutual Funds have to provide the break-up of assets under management (AUM) in terms of debt/equity/balanced and also geography-wise data.
• The scheme performance will have to be disclosed against the Sensex or Nifty in case of equity funds and Government of India (GoI) debt paper in case of debt funds, in addition to the scheme benchmark
• Performance of the fund manager across all schemes managed by the same fund manager will have to be disclosed

Other Changes
• AMCs will continue to manage and advise pooled assets that are broad based such as offshore funds and pension funds etc., provided there is no conflict of interest due to differential fee structure
• AMCs will continue to deal with Portfolio Management Services (PMS) under the current arrangements
• One common account statement (compulsorily mentioning transaction charge paid to the distributor) will be dispatched every month and every half year for investors who have transacted and all non-transacted in any of his folios across the mutual funds, respectively.
• Investors have the option of receiving Annual Reports by email or the hard copy, though investors whose email IDs are registered with the fund would be sent annual reports by email only
• All the operations of a Mutual Fund including trading desks, unit holder servicing, and investment operations shall be based in India

,b>Simplification of KYC
Currently, Know Your Client (KYC) is done by each SEBI regulated intermediary such as a broker, depository participant (DP), asset management company (AMC), portfolio manager etc. In order to save duplication of work, ensure a more hassle-free system for investors and reduce wastage of record-keeping space, one or more KYC Registration Agency (KRA) will be set up and be regulated by SEBI itself.
KRA will now undertake KYC at the stage of account opening for all clients in the securities market through SEBI regulated Points of Service (PoS). The client should not be made to repeatedly fill up forms and submit documents when he wishes to open an account with another intermediary registered with SEBI.
The Unique Identification Document (UID) or Aadhaar number will be included in the eligible documents that can be presented as an identification of the customer, as part of the KYC process.

Mutual Fund Distributors
Selected distributors will be regulated through AMCs by putting in place the due diligence process to be conducted by AMCs. The distributor will be selected on the basis of
1. Multiple point presence in more than 20 locations
2. AUM raised over Rs 100 crore across industry in the non-institutional category but including high networth individuals (HNIs)
3. Commission received of over Rs 1 crore per annum across the industry and Rs 50 lakh from a single mutual fund
AMCs shall disclose the commissions paid to the distributors meeting one or more of the above criteria and the Association of Mutual Fund (AMFI) will disclose the aggregate amount of commissions paid to such distributors by the mutual fund industry.

Infrastructure Debt Fund Schemes (IDFs)
• IDFs can be set up by any existing mutual fund having at least five years of experience in the infrastructure financing sector
• An IDF shall be launched either as closed-end scheme maturing after more than five years or an interval scheme with lock-in of five years
• An IDF shall have a minimum of five investors and no single investor shall hold more than 50 per cent of the net assets of the scheme
• The IDF would invest 90 per cent of its assets in the debt securities of infrastructure companies or special purpose vehicles (SPVs) across all infrastructure sectors
• The minimum investment into IDF would be Rs 1 crore with Rs 10 lakh as minimum size of the unit
• A firm commitment from strategic investors to the extent of Rs 25 crore
• Fully paid up units of IDF schemes shall be listed on a recognized stock exchange
• Mutual Funds may disclose indicative portfolios of IDF schemes to potential investors disclosing the type of assets the mutual fund will be investing.
• Mutual Funds launching IDFs may issue partly paid units to investors


Guidelines for investment by foreign individuals in Indian mutual funds
While there is much clarity for foreigners who want to invest in the schemes of Indian mutual funds, who gets classified under the term ‘foreign individuals’? It is for those who meet the ‘Know Your Client’ (KYC) norms but are not registered with SEBI as foreign institutional investors (FIIs) or a sub-account thereof. Highlights of the guidelines:
• Qualified foreign investors can buy equity and debt funds
• Investment in equity mutual funds capped at $10 billion
• Investment in debt plans capped at $3 billion
• Foreign investors can buy mutual fund schemes via direct or indirect route
• Registered FII, sub-accounts cannot be qualified foreign investors
• Mutual funds to report foreign investors’ purchases and redemptions daily
• Foreign investors cannot avail systematic investment plans (SIPs)
• Foreign investors not to get systematic transfer (STP) or withdrawals (SWP)
• Mutual funds to cut tax at source (TDS) on redemption by foreign investors
• Units held by foreign investors will be non-transferable, non-tradable and cannot be pledged or lien cannot be created for such units.