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Tuesday, April 6, 2010

ASBA for Mutual Funds, NFO 15 days, Corporate Governance norms, No revenue sharing arangement & No dividend from Unit Premium Reserve

To All Mutual Funds (MFs)/Asset Management Companies (AMCs)

1. Brokerage and commission paid to associates
i. Regulation 25 (8) of SEBI (Mutual Funds) Regulations, 1996 mandates that the payment of brokerage or commission, if any, to the sponsor or any of its associates, employees or their relatives, has to be disclosed in the half–yearly annual accounts of the mutual fund.  Now, in the bridged scheme wise
annual report and the SAI, these disclosures shall henceforth be made in the
format as prescribed in Annexure A.
2. Additional mode of payment through Applications Supported by Blocked Amount (ASBA) in Mutual Funds and Reduction in New Fund offer (NFO) period

  1. ASBA is already available for subscription to public  issue & rights issue of equity and now it is extended to the investors subscribing to New Fund Offers (NFOs) of mutual fund schemes. It shall co-exist with the current process, wherein cheques/ demand drafts are used as a mode of payment. The banks which are in SEBI’s list shall extend the same facility in case of NFOs of mutual fund schemes to all eligible investors in Mutual Fund units. Mutual Funds shall ensure that adequate arrangements are made by Registrar and Transfer Agents (RTA) for the implementation of ASBA. Mutual Funds/AMCs shall make all relevant disclosures in this regard in the SAI. Also read [SEBI-ASBA] Lets Learn the Concept.
  2. Reduction of NFO Periods to 15 days: It has been decided that the present limit of maximum period of 30 days in case of Open ended schemes and 45 days of close ended scheme shall be reduced to 15 days (except ELSS schemes). Mutual Funds/ AMCs shall use the NFO proceeds only on or after
    the closure of the NFO period. The mutual fund should allot units/refund of money and dispatch statements of accounts within 5 business days from the closure of the NFO and all the schemes (except ELSS) shall be available for ongoing repurchase/sale/trading within five business days of allotment”.
  3. Applicability: For all NFOs launched on or after July 01, 2010.

3. Non availability of Unit Premium Reserve for dividend distribution

The IX and XI Schedule of SEBI (Mutual Funds) Regulations provide the accounting policies to be followed for determining distributable surplus and accounting the sale and repurchase of units in the books of the Mutual Fund. The Unit Premium Reserve, which is part of the sales price of units that is not attributable to realized gains, cannot be used to pay dividend.  It is therefore reiterated that:

  • When units of an open-ended scheme are sold, and sale price is higher than face value of the unit, part of sale proceeds that represents unrealised gains shall be credited to a separate account (Unit Premium Reserve) and shall be treated at par with unit capital and the same shall
    not be utilized for the determination of distributable surplus.
  • When units of an open-ended scheme are sold, and sale price is less than face value of the unit, the difference between the sale price and face value shall be debited to distributable reserves and the dividend can be declared only when distributable reserves become positive after
    adjusting the amount debited to reserves as per XI Schedule of SEBI (Mutual Funds) Regulations.

4. Role of Mutual Funds in Corporate Governance of Public Listed Companies

It has been decided that henceforth, AMCs shall disclose their general policies
and procedures for exercising the voting rights in respect of shares held by them on the website of the respective AMC as well as in the annual report distributed to the unit holders from the financial year 2010-11.

Further, the AMCs are also required to disclose on the website of the respective AMC as well as in the annual report distributed to the unit holders from the financial year 2010-11, the actual exercise of their proxy votes in the AGMs/EGMs of the investee companies in respect of the following matters

  • Corporate governance matters, including changes in the state of
    incorporation, merger and other corporate restructuring, and anti
    takeover provisions.
  • Changes to capital structure, including increases and decreases of
    capital and preferred stock issuances.
  • Stock option plans and other management compensation issues.
  • Social and corporate responsibility issues.
  • Appointment and Removal of Directors.
  • Any other issue that may affect the interest of the shareholders in
    general and interest of the unit-holders in particular.

The format for disclosure of voting by mutual funds in general meetings of listed companies is placed in Annexure B.
5. Provision of charging of additional management fees by the AMC’s in case of schemes launched on no load basis
Consequent to SEBI Circular Empowering investors through transparency in payment of commission and load structure” which stipulated that No entry load for all Mutual Fund (MF) scheme,all expenses out of 1% Exit load & disclosure of all commissions to distributors from 1st August 2009, it is clarified that AMC shall not collect any additional management fees referred to in Regulation 52(3) of SEBI Mutual Funds Regulation, 1996.  This is applicable to MF schemes which are not launched (including those for which observation letter have been issued).

6. Fund of Funds Scheme
i. It has been observed from the disclosures in the scheme information documents (SID) that Asset Management Companies (AMCs) have been entering into revenue sharing arrangements with offshore funds in respect of investments made on behalf of Fund of Fund schemes. These arrangements create conflict of interest.
ii. It has been decided that henceforth AMCs shall not enter into any revenue sharing arrangement with the underlying funds in any manner and shall not receive any revenue by whatever means/head from the underlying fund. Any commission or brokerage received from the underlying fund shall be credited into concerned scheme’s account.

Source: SEBI/IMD/CIR No 18 / 198647 /2010 dated 15th March 2010


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