PR No.232/2007
Committee on launch of dedicated infrastructure funds by Mutual Funds submits report to SEBI
The SEBI appointed committee on launch of dedicated infrastructure funds (DIF) by mutual funds, headed by Shri U. K. Sinha, Chairman and Managing Director, UTI AMC, submitted its report to Shri M. Damodaran, Chairman, SEBI in Mumbai today. The report has been made available on the SEBI website for public comments.
Presenting the report, the Committee observed that the proposed DIFs will need to be structured differently from the current Mutual Fund schemes, as these will largely invest in unlisted companies, with longer gestation periods. “Venture Capital Funds have the ability to invest in such unlisted and longer tenure projects, but have minimum contribution requirements thus leaving out the retail investors. DIFs can be structured to fill this gap and can be uniquely positioned to benefit both the ongoing infrastructure initiatives as well as potential retail investors”, the Committee said.
Some of the salient features of the Committee’s recommendations are given below:
The Committee has recommended that the DIFs should operate as closed ended schemes with a maturity of seven years and a possibility of one or two extensions, subject to adequate disclosures in the offer documents and approval of trustees. The Committee has also recommended that DIFs should be given a listing option to provide liquidity to retail investors.
The Committee has recommended some tax incentives to retail investors for investment in DIF. The Committee said “considering the long-term and closed ended nature of the proposed DIFs, the Committee believes that it will be extremely important to provide some tax incentives to retail investors to motivate
them to invest in DIFs and therefore help in and benefit from the infrastructure creation in the country. The Committee also believes that without the tax incentives no retail investor would be motivated to invest in a DIF”. The committee has, however, added that such tax benefits should be available only to the original investors.
In terms of investments, the Committee has suggested that the DIFs may be allowed to invest upto 100% of its funds into unlisted securities including both equity and debt instruments. Exposure to listed companies, however, should be limited to 10% of the NAV at the time of making the investments. Further, the DIFs may be allowed to take control of the asset, if they so desire, and own up to 100% of the paid up capital of a company. The Committee has suggested several safeguards to protect the interest of investors.
On fees and expenses the Committee observed that “in light of the unique nature of DIFs like requirement of dedicated teams for the management of such schemes, requirement of in-depth research because of companies being unlisted and information not being easily available, higher level of monitoring of investments, the fee structure of such funds will have to be different from the existing Mutual Fund schemes, in line with global practices.” The Committee suggested that maximum overall permissible expense ratio for DIFs including investment management fees be additional 1% over and above that specified in the Mutual Fund Regulations. Additionally, the DIFs should also be allowed to charge a performance fee after providing a certain minimum return to the unit holders, as per global practice.
On valuations, the committee recommended that the DIFs should report the fund NAV at the time of each asset valuation and also at quarterly intervals. About valuations, the Committee believes that current SEBI guidelines to value unlisted equity shares will need to be suitably amended for the proposed asset class. The proposed DIFs should engage an approved consultant to value the assets semi-annually. Such an approved list can be drawn up by the SEBI registered rating agencies.
The Committee proposes that the DIFs can be launched by all SEBI registered Asset Management Companies (AMCs), but should have a dedicated team for managing the funds and their trustees should be satisfied in this respect.
On investor profile, the Committee suggested that all the individual/ companies/ corporates/ institutions and financial institutions should be eligible for making investment in such mutual funds. The profile of DIFs in terms of tenure, risks and returns are also complimentary to liability side of insurance companies and pension funds. Therefore, Government/concerned Regulators may also consider modifying the investment guidelines for Insurance/pension funds and provident funds so that they could invest directly in such type of mutual funds, as it will serve the twin purpose of meeting sectors’ capital needs as also in managing risk-return requirements of Insurance Companies and Pension Funds.
Highlighting the role of Trustees, the Committee said that “the Trustees shall review the performance and compliance of the regulations in case of DIFs in their periodical meetings and shall report it to SEBI in their reports submitted to SEBI in accordance with the regulations.”
On the disclosure of risk factors, the Committee has recommended that risk factors relevant for such schemes may be disclosed in the offer documents and advertisements for the launch of such schemes. The Committee also recommended that “In addition to disclosure of the NAVs and annual accounts of the scheme, the DIFs may also report financial review of each investee company and the status of implementation of various projects, on quarterly basis. The valuation methodologies may be approved by the trustees and may also be disclosed to investors.”
It may be recalled that the Hon’ble Finance Minister in his budget speech for 2007-08 had inter-alia announced that to promote the flow of investment to the infrastructure sector, mutual funds would be permitted to launch and operate dedicated infrastructure funds. SEBI then appointed a committee headed by Shri U K Sinha, in March 2007, in order to suggest a detailed action plan to operationalise the budget announcement. The other members of the committee were: Shri Milind Barve, Managing Director, HDFC AMC and Shri S. Naganath, President, DSP Merrill Lynch Managers Ltd. Shri P. K. Nagpal, Executive Director, SEBI was the Member Secretary.
The full report of the Committee is available on the website www.sebi.gov.in under the section “Reports/ Documents” under the heading “Reports for Public Comments”.
Mumbai,
August 06, 2007
