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Mutual Funds - Mutual funds liquid schemes under Sebi scanner

06 Jul 2012

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Audit teams hired by capital market regulator Sebi have questioned the way several asset management companies sell liquid schemes - the most popular mutual fund product. They suspect that fund houses give a better deal to select customers by advising them to split investments and benefit from a possible price advantage. Under the rules, an investor putting in 1 crore or more into a liquid fund is allotted MF units at the same day’s net asset value, or NAV, which is roughly the price of an unit. But for smaller investments, units are sold at the previous day’s NAV. In both cases, fund houses will receive the money as and when cheques are cleared.

But the rule, which is intended to give greater flexibility to small investors, is being twisted by some high net worth and institutional investors. "We’ve seen several cases where investors have put in multiple applications of smaller denominations. For instance, an investor who puts in 2 crore into a liquid fund submits four applications and four cheques of 50 lakh each. And in most cases, fund houses have issued units at the previous day’s NAV. This is against the spirit of Sebi regulations," said a person who has participated in the audit process. Sebi, sources told ET, has directed as many as 30 fund houses, including top names like HDFC Mutual, Birla Sun Life MF, Reliance MF, ICICI Prudential MF, DSP Blackrock and Kotak MF, to "make good the losses" suffered by other investors in their funds due to the sharp business practice.

All these fund houses will have to dip into their pockets to pass back the amount to accounts of schemes where multiple applications were accepted. The amount will vary from 26 lakh to 2 crore. Preferring anonymity, the CEO of a large fund said, "The action of the auditors is in line with the Sebi circular. But the way they have interpreted the circular is wrong. Fund houses do not gain a penny allowing such transactions.

Accepting split applications is a big logistical headache for most fund houses." Sebi rules specify that large-ticket investors should not pocket ’dual returns’ - or previous day accruals - on their short-term debt funds. Large-ticket investors investing more than 1 crore can avail the previous day’s NAV only if the fund house receives the money before 2 pm. Keeping regular investors happy While many HNIs can electronically transfer the amount before 2 pm, they prefer to pay later to stay invested in some other product for an extra day.

According to industry officials, auditors also considered genuine fund switches as multiple applications. "In the past two years, investors have resorted to several fund switches - mostly from equity funds to liquid schemes to get protection against unfavourable stock markets. These switches are usually made on the same day and from multiple equity funds. These may look like split application transactions, but in reality they are not," said the sales head of a leading fund house.

But some in the industry said many mutual funds often choose to keep regular investors in good humour, particularly in a difficult market that has taken the sheen off equity schemes. "Such an arrangement would have worked only for small liquid fund investors. Sebi should remove the Rs 1-crore slab and make ’current day NAV’ mandatory for all investments in liquid funds. That will put an end to all this," said Sunil Jhaveri, chairman, MSJ Capital & Corporate Services, a New Delhi-based mutual fund advisor.

Source: ET Bureau BACK