VR Logo

From the regulator

SEBI has issued clarifications on the new fund-categorisation system. It has also tightened rules for the appointment of auditors and trustees of fund houses

From the regulator

Modifications in the new fund categories:
In October this year, SEBI came up with the new categories for mutual funds. In our earlier article, The grand fund makeover we had given the detailed classification that SEBI had issued.

The new categories are aimed at bringing consistency in types of schemes across fund houses in an effort to reduce confusion for the investors. However, the fund association AMFI raised some concerns with the regulator regarding the new categories. As a result, SEBI has come up with some modifications. They are as follows:

  • In its earlier circular, SEBI had set criteria for defining large, mid and small caps. It had instructed the fund body AMFI to prepare a list of companies across various market caps. In the modified version, SEBI has now said that in order to calculate the market cap of a stock, average of its market cap over the last six months should be taken.
  • For ultra short-duration, low-duration, short-duration, medium-duration, medium to long-duration and long-duration funds, the Macaulay duration requirements will be applicable for the full portfolio and not individual instruments. The Macaulay duration is a financial tool used to determine the maturity of a bond.
  • Medium-duration funds and medium to long-duration funds have been allowed to lower their Macaulay duration to one year if the fund manager anticipates that the interest rates will move adversely. The AMC will have to clearly state the rationale behind its decision. Normally, the Macaulay duration for medium-duration funds should be three to four years and that for medium to long-term ones should be four to seven years.
  • Corporate bond funds are now allowed to invest in AA+ securities. Earlier they were allowed to invest only in the highest-rated (AAA) bonds.
  • Credit-risk funds were earlier defined as ones that invested 65 per cent of their assets in below highest-rated bonds. The clarification adds that such funds should invest in AA and below-rated instruments.
  • Banking and PSU debt funds have been allowed to take exposure to municipal bonds.
  • Floater funds can also invest in an instrument that has converted from being a fixed-rate one to a floating-rate one.

Fund houses need to review their funds and submit proposals to SEBI by December 15. This date was earlier December 6 but now stands revised.

Improving the corporate-governance standard
In order to improve the standard of governance of mutual funds, SEBI has come up with some measures. These measures deal with the tenure of independent trustees, independent directors and auditors of fund houses.

Independent trustees and directors can now hold office for a maximum of two consecutive terms of five years. They will be eligible for reappointment only after a cooling-off period of three years. During the cooling-off period, they cannot be associated with the AMC in any way.

Similarly, auditors can serve at an AMC for a maximum of two consecutive terms of five years. They will be eligible for reappointment after a cooling-off period of five years. The new auditor appointed during the cooling-off period shouldn't have any links with the outgoing auditor.

How does this ruling impact the existing independent trustees, independent directors and auditors? They can serve for a period of ten years. If they have already served for a period less than nine years, they can serve the rest of the years in their tenure. If they have already served for more than nine years, they can serve for a maximum of one year from November 20, 2017.