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Oops! A Drafting Error by SEBI

A drafting error by SEBI has rendered the recently issued guidelines on dividend declaration and distribution by mutual funds ineffective

A couple of weeks back, the SEBI finally issued a circular to amend the much debated regulations regarding the initial issue expenses. While the amendments were largely regarded as a positive move, the same circular also listed some amendments to the way funds declare and distribute dividends. The SEBI circular stated that fund houses should issue the notice of dividend within one day of the decision by the trustees to distribute the dividend. Further, the record date for such dividend should be five days from the issuance of the notice. Before the issuance of notice, no communication indicating the probable date of the dividend declaration should be made.

While the guidelines regarding dividend have been issued with a view to bring uniformity in the procedure for dividend distribution, but a drafting error on part of the regulator has rendered them ineffective.

The circular mentions “This circular would be applicable to all mutual fund schemes launched after the date of the circular.” This makes sense for the changes in relation to initial issue expenses as the amended regulations could only be applicable to the new funds. But even the regulations regarding the dividend are applicable to only the new funds. This is absurd since the vast pool of existing schemes have effectively been left free to declare and distribute dividends the way they do presently, thus defeating the very purpose of such an amendment.

Prudential ICICI Mutual Fund has declared record dates for dividend under three of its schemes- Pru ICICI Dynamic, Pru ICICI Emerging STAR and Pru ICICI Balanced plan to be April 24, May 8 and June 3, 2006, respectively. Had the circular been drafted properly, then declaring record dates so much in advance would not have been possible for the existing funds. The SEBI is expected to bring out the 'amended' version of the amendments soon.