Market regulator Sebi announced implementation of a number of steps for the benefit of mutual fund industry, including an additional levy on investors for catering to smaller cities and availing the services of a whole new class of persons as distributors.
As per the proposals approved by Sebi's board on August 16, the Securities and Exchange Board of India (Sebi) said, a number of steps are being taken to increase the penetration of MF and to energise the distribution network while protecting the interest of investors.
Among the measures announced, the MFs can charge up to 30 percentage points of additional TER (Total Expense Ratio)—a fee charged to investors for MF investments under fund management and other heads —if the new inflows from beyond top 15 cities are at least 30 percent of gross new inflows in the scheme or 15 percent of the average assets under management (year to date), whichever is higher.
The top 15 cities would be decided on the basis of data compiled by the Association of Mutual Funds in India (AMFI) data for 'AUM by Geography—Consolidated Data for Mutual Fund Industry' as at the end of the previous financial year.
MFs would need to make complete disclosures in their half yearly report to Sebi regarding the efforts to increase geographical penetration and the details of opening of new branches, especially those beyond top 15 cities.
In another step, Sebi has allowed MFs to charge service tax on investment and advisory fees to the scheme. Also, MFs have been asked to launch schemes under a single plan and ensure that all new investors are subject to single expense structure. Existing schemes with multiple plans can accept fresh subscriptions only under one plan and other plans will continue till the existing investors remain invested in the plan.
Sebi also asked MFs to provide a separate plan for direct investments (investments not routed through distributor) in existing as well as new schemes. Such separate plans shall have a lower expense ratio excluding distribution expenses and commission, and no commission shall be paid from such plans.
The Sebi directive for direct MF investments would be effective from January 1, 2013, while all other measures would come into effect from next month, or October 1, 2012. Regarding distribution of mutual fund products, Sebi said that all the agents or distributors of MF units are required to obtain certification from the National Institute of Securities Markets (NISM) and registration from AMFI.
A new cadre of distributors, such as postal agents, retired government and semi-government officials, teachers and bank officers with a service of at least 10 years, and other similar persons (such as Bank correspondents) may be allowed to sell units of simple and performing mutual fund schemes.Sebi said that this new cadre of distributors would require a simplified form of NISM certification and AMFI registration.
Also, AMFI should create a unique identity number of the employee/relationship manager/ sales person of the distributor interacting with the investor for the sale of mutual fund products, in addition to the AMFI Registration Number.
Sebi also asked MFs to annually set apart at least two percentage points on daily net assets within the maximum limit of TER for investor education and awareness initiatives. Besides, MFs have been asked to make monthly portfolio disclosures for all their schemes "in a user-friendly and downloadable format (preferably in a spreadsheet)" and in the same format as that of half yearly portfolio disclosures.
MFs may have to disclose certain additional information such as charges and fees as well, subject to compliance with the Advertisement Code. In order to help enhance the reach of MF products amongst small investors, who may not have PAN/bank accounts, such as farmers, small traders/businessmen/workers, Sebi has allowed cash transactions of up to Rs 20,000 per investor in a mutual fund every year.
However, any repayment like redemptions and dividend with respect to such investments would be paid only through banking channel. Sebi has also set certain prudential limits and disclosure norms for portfolio concentration risk in debt-oriented mutual fund schemes.
It has asked MFs to ensure that total exposure of debt schemes of mutual funds in a particular sector, barring a few exceptions, shall not exceed 30 percent of the net assets of the scheme. For transaction charges, distributors shall have the option to either opt in or opt out of levying transaction charge based on type of the product.
Also, MFs would need to make half yearly disclosures of their unaudited financial results, along with additional details like total commission and expenses paid to distributors, distributor-wise gross inflows, net inflows and average assets under management.
In case the data suggests that a distributor has an excessive portfolio turnover ratio, say more than two times the industry average, AMCs shall conduct additional due-diligence of such distributors, Sebi said.
For harmonising the applicability of NAV across schemes, Sebi said that in respect of purchase of units of MF schemes, the closing NAV of the day on which the funds are available for utilisation shall be applicable for application amount equal to or more than two lakh, irrespective of the time of receipt of such application.