Mutual Funds

"Mutual Funds 2000"

During 1995-96, SEBI had prepared and widely circulated a paper titled "Mutual Funds 2000" which identified ways to improve the working and regulation of the mutual fund industry, so that mutual funds could provide a better performance and service to all categories of investors and offer a range of innovative products in a competitive manner to match investor needs and preferences across various investor segments. Based on the comments received on the recommendations made in the paper by market participants and investors and on discussions held with the Association of Mutual Funds of India (AMFI), the SEBI (Mutual Funds) Regulations, 1993 were revised and the new regulations notified in December 1996.

The SEBI (Mutual Funds) Regulations, 1996

The revised regulations embodied far reaching changes in the regulation and functioning of mutual funds. The revised regulations provide for

• enhanced level of investor protection
• empowerment of investors
• stringent disclosure norms in the offer documents, so that investors are better informed, better advised, better aware of risks and rewards
• standardisation of norms for valuation of assets, computation of Net Asset Values (NAVs) of schemes of mutual funds and accounting standards and policies
• complete freedom to asset management companies to structure schemes in accordance with investor preferences
• removal of quantitative restrictions on investment by mutual funds and replacement by prudential supervision
• replacement of vetting of offer documents by filing
• guaranteed return schemes by mutual funds permitted provided returns including capital were guaranteed
• indication of expected returns based on hypothetical portfolio permitted
• better governance of mutual funds through higher responsibilities and empowerment of trustees as front-line regulators of mutual funds
• closer scrutiny through off site and on site inspections
• code of ethics for asset management companies

The impact of the new regulations was immediately felt. Asset management companies framed several schemes which made use of the freedom provided to them by the new regulations. Not only did the number of schemes filed with SEBI increase significantly in a short period of time, but also there was greater variety in the investment products offered. There was also a significant improvement in disclosures in the offer documents.

The new regulations have brought into greater focus the responsibilities of trustees of mutual funds who are uniquely positioned to promote the interests of the unitholders and to ensure that mutual funds are managed responsibly and ethically. The trustees act independently to uphold the public trust. In this process, trustees act as the first level regulators and are critical in helping to ensure the profitability and progress of the mutual funds. To assist trustees in their new role, and to set out the manner in which they could best perform this role, SEBI appointed a committee under the chairmanship of Shri P K Kaul, former Cabinet Secretary and Ambassador to the United States.

SEBI is using its interface with AMFI to assess the impact of the new regulations on the working of mutual funds and to examine further ways of improving the performance of mutual funds so as to restore investor confidence in them. SEBI also continued working with AMFI so that it becomes a more effective body representing the mutual fund industry and embarks on a campaign to sharpen the industry's focus on the consumer.

Pension schemes and money market mutual funds

Another important development in the mutual fund industry during the year was the issuance of Guidelines for Money Market Mutual Funds by RBI. These guidelines were subsequently incorporated into the revised SEBI regulations and paved the way for the introduction of money market schemes by mutual funds for the first time. Similarly, pension schemes were also launched by mutual funds for the first time under section 88 (xiii-c) of the Income Tax Act, 1961

Difficulties faced by assured return schemes

Some of the mutual funds who had launched schemes with assured return features prior to the notification of the SEBI (Mutual Fund) Regulations, 1993 found it difficult to fulfil the assurances. These schemes are the `Canstar' scheme of the Canbank Mutual Fund (CBMF) and the `GIC Big Value' scheme of the GIC Mutual Fund (GICMF). In the case of Canstar scheme of CBMF which assured return by way of repurchase price of Rs 23/- commencing from September 1996, the trustees of the Fund had sought the approval of unitholders for alteration of the terms of the scheme by calling a unitholders' meeting. As the scheme had over 2 lakh investors SEBI felt that it will not be proper to allow the fund to alter the terms of the scheme on the basis of a unitholders' meeting that few unitholders would be able to attend. It had therefore directed CBMF to conduct a postal ballot to seek the opinion of all the unitholders. This was the first time that the procedure of postal ballot to obtain the consent of the unitholders was used in the country. The 216 unitholders who attended the meeting and over 33,000 unitholders who participated in the postal ballot overwhelmingly rejected the proposal of the trustees of modifying the terms of the scheme or winding up the scheme.

It has been SEBI's consistent view in keeping with its mandate to protect the interest of the investors that wherever any commitment has been made by any mutual fund to its investors, the mutual fund must honour that commitment. SEBI would consider appropriate action under its regulatory framework in case the mutual fund does not honour its commitment.

In the case of GIC Big Value scheme which also could not meet the commitment by way of assured repurchase price, SEBI had directed the GIC Asset Management Company to discuss with the Board of GIC, the sponsor of the mutual fund and with other shareholders of the asset management company on the manner in which the shortfall would be met and till such time the mutual fund will not be allowed to launch any further schemes till the commitment was met by the fund in respect of the GIC Big Value scheme. The shortfall was also noticed in the assured return schemes of two other mutual funds viz. LIC Mutual Fund and SBI Mutual Fund. The sponsors of these funds voluntarily agreed to meet the shortfall in the resources by funding the respective asset management companies.

With the present requirement that the assured return schemes can now be launched provided the returns are guaranteed by the sponsor or asset management company and sufficient funds are available with them to meet the guarantee, it is expected that investors will be protected from similar difficulties in the future.