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The Saga Continues…

SEBI's regulation on single investors' concentration is meant to insulate small investors from the behaviour of large investors. Actually it does the opposite

Bajaj Auto Ltd, one of corporate India's best known names has sued UTI and I'm very happy about it. Actually, I'm not happy that UTI is being sued-it is the Securities and Exchange Board of India (SEBI) that should have been sued. What I'm really happy about is that one of the most ridiculous regulations that have been issued by SEBI has ended up being challenged in court. Let me jog your memories in case you still haven't figured out what I'm talking about.

There are many mutual funds that are dominated by a small number of investors. Some of these are specifically created to cater to specific investors, who find it a good way to save on taxes. If the government wants to shut down these funds, it needs to change the tax loopholes which create the incentives for such funds.

At Mutual Fund Insight, we first wrote about these funds in June 2003 (When Just One is Enough). In December 2003, SEBI came up with a 'solution' to this problem and stipulated that mutual funds who had more than 25 per cent of their AUM from a single investor and had less than 20 investor in all were to be shut down by December 31, 2004.

At the time I wrote an editorial titled 'SEBI (is) for Dummies', pointing out that this was a ridiculously easy rule to circumvent if an AMC wanted to do so. Also, there are many funds that fit this criteria but are 'genuine' funds, in the sense that they were not created as tax dodges for specific customers but just happen to have one investor whose investment is much larger than others'.

All in all, this seemed to be the worst kind of regulation possible because those who were really interested in dodging it could do so easily. However, there would inevitably be some innocent bystanders who would get trapped in it.

Now it seems to me that one innocent bystander (Bajaj Auto) is suing another (UTI). Incidentally, UTI is one of the few AMCs that has never dabbled in launching blatant tax-dodge single investor funds. UTI has had to wind up its bonus option of Growth & Value Fund because it doesn't fit SEBI's criteria and Bajaj Auto, which had a large sum invested in this fund, is apparently having to book large taxable capital gains for no fault of its own.

Now Bajaj Auto is not the only investor and UTI is not the only fund house where this has happened. I really wish all investors who have had their investments returned to them get together and sue various mutual funds since that seems to be the only way that offers some possibility of getting this regulation overturned.

The reason why I'm so opposed to this regulation is that it seems to symbolise everything that is wrong with the way the financial markets are being regulated in this country. Like many other pieces of 'regulation' that happen in India, this rule is one which tries to modify market participants' behaviour in a completely impracticable way.

This rule is meant to insulate small investors from the behaviour of large investors. Actually it does the opposite. Now, you could invest in some fund and suddenly, without any warning, find your money redeemed, possibly because one large investor left and because of that another one became more than 25 per cent of the fund. It can't be any more bizarre than this.