Impact of SEBI Guidelines on Mutual Funds Industry

8/9/2019 Impact of SEBI Guidelines on Mutual Funds Industry

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Assignment 2.

OfFinancial Institutions and

Services

Topic:

Impact of Changes in SEBI guidelines on

the players of Mutual Fund Industry

(UTI Mutual Fund)

Submitted To: Submitted By:


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Introduction to Mutual Fund

A mutual fund is a professionally managed type of collective investment scheme that poolsmoney from many investors and invests it in stocks, bonds, short-term money marketinstruments, and/or other securities. The mutual fund will have a fund manager that trades the

pooled money on a regular basis. The net proceeds or losses are then typically distributed to theinvestors annually. So, we can say that Mutual funds are investment companies that pool moneyfrom investors at large and offer to sell and buy back its shares on a continuous basis and use thecapital thus raised to invest in securities of different companies.

History of Mutual Funds in India and role of SEBI in mutual funds

industry

Unit Trust of India was the first mutual fund set up in India in the year 1963. In early 1990s,

Government allowed public sector banks and institutions to set up mutual funds.

In the year 1992, Securities and exchange Board of India (SEBI) Act was passed. The objectives

of SEBI are to protect the interest of investors in securities and to promote the development of

and to regulate the securities market.

As far as mutual funds are concerned, SEBI formulates policies and regulates the mutual funds to

protect the interest of the investors. SEBI notified regulations for the mutual funds in 1993.

Thereafter, mutual funds sponsored by private sector entities were allowed to enter the capital

market. The regulations were fully revised in 1996 and have been amended thereafter from time

to time. SEBI has also issued guidelines to the mutual funds from time to time to protect the

interests of investors.

All mutual funds whether promoted by public sector or private sector entities including those

promoted by foreign entities are governed by the same set of Regulations. There is no distinction

in regulatory requirements for these mutual funds and all are subject to monitoring and

inspections by SEBI. The risks associated with the schemes launched by the mutual funds

sponsored by these entities are of similar type.


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Impact of SEBI on Mutual Fund Industry:

1. SEBIs Latest Ruling- No entry load on any mutual fund investmentThe recent ruling by the Securities and Exchange Board of India, SEBI, on the removal of entry

load on mutual fund investments has brought appreciation as well as criticism from different

corners. Last year SEBI had done away with entry load in cases where the investors directly

invested in mutual funds without going through an agent or a distributor.

With the new ruling in place, investors will be free to negotiate the commission with theirdistributor and if they are smart negotiators they may even pay nil commission on theirinvestments. Because now that there will be no entry load on the money that you will invest inany mutual fund scheme all the money that you invest will be used to buy mutual fund unitsunlike earlier when 2.25 per cent would be lopped off and the rest invested. The benefits forinvestors are:

No entry load Distributors will get a fee for their advice and hence distributors will have to give the

right advice rather than promoting schemes, which offer them superior brokerage No more churning of the portfolio of the investors which many distributors used to

indulge in especially when a New Fund Offer (NFO) would be announced to earn heftycommissions without any care for your money

Some distributors would make the investors exit their old funds and make them invest in newfund where the commission would be high. It is not that NFOs are not good investments but thispractice which some of the distributors used to follow was wrong and unethical.

However, the flip side is now there also will be no cash back to the investor. Earlier, the practicewas that the distributor would pay back the investor a small amount out of the commission heearned from mutual fund companies making the investor feel good about it.

The recent SEBI move brings in a greater degree of transparency in investments in mutual fundsand investors will be benefited as they would now get real advice in the true sense.

Impact on UTI Mutual Fund.

This would cause losses to the retail distributors, the fund houses to some extent, and the

relationship managers of banks who made a neat commission out of their advice to investors onwhich funds to buy and sell. The business of Fund Houses like UTI would also be affected aswith passage of time the retail distributors may reduce or may entirely stop selling mutual fundsas it may no longer be lucrative to them. SEBI has also passed a ruling for the distributors todisclose their commissions and other benefits. This ruling obviously did not go down well withthe industry. SEBI's ruling will be applicable to:


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All investments in the mutual fund schemes -- including additional purchases or switchfrom one scheme to the other -- with effect from August 1, 2009

New schemes launched from or after August 1, 2009 Systematic investment plan (SIP) registered on or after August 1, 2009

There are still lots of ifs and buts as SEBI is still to issue complete guidelines. But thispreliminary guideline too is a revolutionary step in itself as investors will now be paying for theright kind of advice.

2. SEBI caps MF Exposure to Money Market & allows FIIs, funds to invest in

IDRs

In order to mitigate concentration risk, The Securities and Exchange Board of India (SEBI) has

decided to amend the Seventh Schedule of SEBI (Mutual Fund) Regulations to provide that no

mutual fund scheme shall invest more than 30% of its net assets in money market instruments ofan issuer.

The schemes may, however, continue to invest up to 15% or 20% of net assets, as the case may

be, in other investment grade debt instruments of an issuer as already provided in the

Regulations. These limits will not cover investments in government securities, T-Bills and

Collateralized Borrowing and Lending Obligations (CBLO).

IDR (Indian Depository Receipts)

SEBI Board has approved proposals to enable:

(a) mutual funds and FIIs to invest in IDRs subject to FEMA

(b) demat holding of IDRs

(c) issue of depository receipts by custodians on behalf of issuers.

This move can widen the investor base and increase liquidity for IDRs that will be issued in

India. Initially when IDRs were introduced, the government allowed only Indian citizens to

invest. Like American Depository Receipts (ADRs), where Indian companies raise money from

overseas market, IDRs would enable foreign firms to raise money from the Indian markets.

Impact on UTI Mutual Fund:

This would impact UTI as this amendment will increase liquidity for IDRs. Investors will

consider safe and profitable investing in IDRs then in UTI, causing losses to the company.


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3.SEBI allows mutual funds to sell government securities

In its efforts to further develop the debt market, SEBI has decided on April 16, 2008 to allow

mutual funds to sell government securities contracted for purchase in DVP III mode for

government securities market in accordance with the guidelines issued by Reserve Bank of India

in this regard.

Under the DVP III mode of settlement, it is possible to sell government securities, already

contracted for purchase without taking delivery provided the transaction is guaranteed by an

approved central counterparty namely Clearing Corporation of India Ltd (CCIL).

Presently, mutual funds cannot sell such securities contracted for purchase as they are required

under SEBI Regulations to take the actual physical delivery of securities. This decision will put

mutual funds at par with other market participants like Banks, Primary Dealers and Insurance

Companies as they can now go in for the net settlement of government securities transactions.SEBI Board also approved the participation of mutual funds in when-issued (WI) market.


This ruling will have a positive impact on the profits of UTI. As they can easily sell government

securities , this will increase the liquidity and keep them at par with other competitors. It wouldbring about a level-playing field among insurance companies, primary dealers, banks and mutual

funds. As of now, mutual funds were not allowed to sell government securities unless they had

physical delivery of the same.

4.SEBI allows launch of real estate mutual fund scheme

Market regulator Securities and Exchange Board of India (SEBI) has decided to allow mutual

funds (MF) to launch real estate mutual fund (REMF) schemes. It has amended the SEBI

(Mutual Funds) Regulations 1996 to permit the launch of REMFs.

The notification, citing eligibility criteria for those seeking to launch REMFs, stated that they

would have to be in the field of real estate business for a minimum of five years and have

adequate experienced directors.The SEBI added that the schemes will have to be close-ended

with its units listed on a recognised stock exchange wherein the net asset value (NAV) will bedeclared daily.Such schemes will have to invest at least 35 percent the net assets directly in the

real estate business and the rest in in mortgage backed securities and securities of firms involved

in real estate business. The regulator added that the assets of the asset managers should be valued

every 90 days.


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This amendment will be beneficial for the company as it grants them permission to invest in real

estate providing more investment opportunities. The notification, however, has granted a go-

ahead to MFs wanting to invest in any real estate asset owned by the sponsor or the asset

management company or any of its associates.

5.Mutual Funds can now invest $7 bn overseasWith a view to providing greater opportunity for investment overseas, the aggregate ceiling for

overseas investment by Mutual Funds registered with the Securities and Exchange Board of

India (SEBI) has been enhanced from USD 5 billion to USD 7 billion with effect from 3rd April

2008. The existing facility to allow a limited number of qualified Indian Mutual Funds to invest

cumulatively up to USD 1 billion in overseas Exchange Traded Funds, as may be permitted bySEBI, shall continue. The investments would be subject to the terms and conditions and

operational guidelines as issued by SEBI.

The move is in line with the Reserve Bank of India's stated policy of encouraging flow of money

outside the country. However, even the existing limit is not being utilised by Asset management

companies. Industry estimates the amount invested overseas at less than $2 billion.

To enable the Mutual Funds to tap a larger investible stock overseas, Reserve bank of India has

announced on 8th June 2007, that they may also invest in

i) Overseas mutual funds that make nominal investments (say to the extent of 10% of net asset

value) in unlisted overseas securities;

ii) Overseas exchange traded funds that invest in securities; and

iii) ADRs/GDRs of foreign companies.

Impact on UTI Mutual Funds:

The impact of it would be that it will allow Indian mutual fund industry to widen their operation.

As per Sebi guidelines, MFs can now make investment in foreign debt securities, short- as well

as in long-term debt instruments with the highest foreign currency credit ratings. MFs can alsoinvest in overseas government securities of countries rated AAA. But this would have negative

impact on domestic players like UTI as people will go for investment overseas.

But the move will not have any major implications immediately, as Indian mutual funds have

invested only around $1.5 billion in overseas markets so far.


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6.Sebi may allow MF units to be traded on exchangesThe Securities and Exchange Board of India (Sebi) is now planning to enable investors to buyand sell mutual fund units through stock exchanges. Fund houses will also be allowed to sell newfund offers (NFOs) through exchanges, helping them to save on distribution costs.Trading on

stock exchanges would be in addition to the proposed platform being developed by Associationof Mutual Fund of India (Amfi).The sources added that Sebi was keen on stock exchange-basedmutual fund purchases and sales or redemption because the Amfi platform could take a while tobe ready.

At present, investors have to approach fund houses to buy or redeem units. On their part, fundhouses declare net assets value (NAV) on a daily basis and trading takes place on the basis of theprevious days NAVs.Under the new mechanism, fund houses have to offer two-way quotesbased on the previous days NAV for trading.Apart from the sale and purchase of units, newfund offerings could also be made through the stock exchange channel in addition to thosethrough distributors.


This will have positive impact on UTI as now they can sell their offers through exchanges ,helping them to save their distribution costs. This will enhance their business activities andprofits. Investors will also find easy way to transact.

7. Introduction of Gold ETF in India

With the permission to allow Gold ETFs, Sebi has enabled mutual funds to purchase physical

gold and issue units to the buyers against the same. However, since the units will be issued in

demat form, investors will have the comfort of offloading any number of units on the NSE

without having to bear any exit load. Gold futures investors would need to watch ETFs closely.

In case of gold futures, the cost of carrying turns out to be high as compared to holding units of a

gold ETF in the demat account. However, despite such a possibility of gold ETFs taking over the

business from investors trading in gold futures through commodity exchanges, commodity

exchange members are not bothered.

Gold ETFs cater to people who want to invest and trade in gold without the risks traditionally

involved.

Impact on UTI Mutual Funds:

Gold exchange traded funds (ETFs) are fast emerging as a lucrative investment avenue apart

from mutual funds, stocks and bonds, though they still need to go a long way to catch investors

fancy. . Gold ETFs cater to persons who want to invest and trade in gold in the demat form


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thereby eliminating the cost and risks associated with physical gold investments. when trading in

gold ETF becomes more popular with investors and the daily volumes of units traded of gold

ETFs on NSE pick up, there are good chances that even the difference in gold future prices

between commodity exchanges and gold ETFs on NSE is likely to activate some degree of

arbitrage between the two. This, in turn, is likely to encourage higher volumes and turnover on

the commodity exchanges as well. Such an arbitrage, till date, is only possible between the

trading carried through MCX futures and NCDEX futures.This will enhance the business of UTI

also.

Bibliography

http://investmoneyinindia.com/sebi-may-allow-mf-units-to-be-traded-on-exchanges/

http://www.sebi.gov.in/boardmeetings/liquidity.html http://www.banknetindia.com/banking/90414.htm http://www.thaindian.com/newsportal/business/sebi-allows-launch-of-real-

estate-mutual-fund-scheme_10042005.html

http://www.business-standard.com/india/news/sebi-may-allow-mf-units-to-be-tradedexchanges/371083/

http://www.livemint.com/2008/04/29230206/Gold-ETFs-yet-to-shine-but-an.html

Documents

Impact of SEBI Guidelines on Mutual Funds Industry