The Securities and Exchange Board of India (SEBI) released two circulars for mutual funds on February 28, 2012. One of them pertains to the change in valuation of debt and money market instruments and advertisement.
For valuation of debt and money market instruments, SEBI has stated that in its circular issued on February 2, 2010, the reference to ‘91 days’ shall be replaced with ‘60 days effective from September 30, 2012. It also mandates AMCs to disclose all details of debt and money market securities transacted (including inter scheme transfers) in its schemes’ portfolio on their AMCs’ website. Fund houses are also required to provide this information to AMFI for consolidation and dissemination. AMCs are required to make these disclosures settlement date wise on a daily basis with a time lag of 30 days.
For advertisements, SEBI has withdrawn erstwhile circulars dated June 5, 2000, June 26, 2003, February 26, 2008, December 15, 2009, January 18, 2010 and February 4, 2010 issued on the subject. But it requires MFs to continue to comply with:
i. While advertising dividend payout, MFs will need to disclose the dividends declared in rupees per unit along with the face value of each unit of that scheme and the prevailing NAV at the time of dividend declaration.
ii. MFs will need to disclose if distribution taxes are excluded while calculating the returns when they are advertising returns by assuming reinvestment of dividends.
iii. All advertisements will disclose, immediately below the payout figure (in percentage or absolute terms) that the NAV of the scheme, pursuant to the payout would fall to the extent of the payout and statutory levy (if applicable).
iv. In case of Money Market schemes or cash and liquid schemes, wherein investors have very short investment horizon, the performance can be advertised by simple annualisation of yields if a performance figure is available for at least 7 days, 15 days and 30 days provided it does not reflect an unrealistic or misleading picture of the performance or future performance of the scheme.
The other circular deals with clarifications on distributor due diligence and on Regulation 24 of SEBI (Mutual Funds) Regulations, 1996.
For distributor due diligence, SEBI has clarified that this due diligence is the responsibility of MFs/AMCs alone and cannot be delegated to any agency. However, MFs/AMCs may take help from an agency ‘of repute’ while carrying out due diligence of distributors.
The clarification on Regulation 24 of SEBI (Mutual Funds) Regulations, 1996 deals with the problem of conflict of interest where a fund manager manages schemes of an MF and is also engaged in other permissible activities of the AMC. The Regulation mandates that AMCs will appoint separate fund managers for each separate fund managed by it unless the investment objectives and assets allocations are the same and the portfolio is replicated across all the funds managed by the fund manager.
However, it had been informed to the regulator that perfect replication of portfolio between MF scheme and schemes/products under other permissible activities of AMC may not be achieved at all times. Hence, SEBI has decided that the replication of a minimum 70% of portfolio value will be considered as adequate for the purpose, given that the AMC has a written policy for trade allocation and it ensures that the fund manager does not take directionally opposite positions at any time in the schemes managed by him.
The regulator, in order to bring more transparency in a situation where a fund manager manages MF schemes as well as schemes/products under other permissible activities of AMC, requires AMCs to:
i. disclose on their websites, the returns provided by that particular fund manager for all schemes (MFs, pension funds, offshore funds and other) on a monthly basis.
ii. when the AMC issues a performance advertisement for any scheme, it need to detail returns of all schemes managed by that fund manager.
iii. if there is a difference of more than 10% between the annual returns provided by the schemes managed by the same fund manager, then it will need to be reported to the trustee and the reason explained on the website of the AMC.