SEBI – Development of a long term policy including financial inclusion & tax issues for mutual funds
PRESS RELEASE NO. 77/2012, DATED 16-8-2012
The SEBI Board met today and took the following decisions:
A. Steps to Re-energise Mutual Fund Industry
SEBI Board took note of the lack of penetration of mutual fund products, inadequate distribution network, need for greater alignment of the interest of various stakeholders, regulation of distributors and issues concerning investor protection, and has approved some immediate steps as given below and has decided to develop a long term policy including financial inclusion and tax issues for mutual funds to deal with the public policy objectives of achieving sustainable growth of the mutual fund industry and mobilisation of household savings for the growth of the economy.
I. Increase in penetration of mutual fund products and energising distribution network
1. To accord flexibility and bring cost effectiveness, fungibility of Total Expense Ratio (TER) is allowed.
2. To energize the distribution system and to increase the ‘feet-on-street’ in distribution, it was decided to:
i. Simplify the distributors’ registration process and increase base of mutual fund distributors by including postal agents, retired officials from government, banks, retired teachers etc. for distribution of simple products.
ii. Introduce varied levels of certification and registration depending on products & services offered.
iii. Reduce fees for NISM certification and AMFI registration.
II. Improve reach of MF products in smaller cities/towns (beyond top 15 cities)
1. To improve the geographical reach of mutual funds and, bring in long term money from smaller towns, AMCs are allowed to charge additional TER (upto 30bps) depending upon the extent of new inflows from locations beyond top 15 cities. AMCs will be able to charge 30 bps if the new inflows from these cities/ towns are minimum 30% of the total inflows. In case of lesser inflows the proportionate amount will be allowed as additional TER.
2. Mutual funds shall make complete disclosures in the half yearly report of Trustees to SEBI regarding the actual efforts of the mutual funds to increase penetration and the details of opening of new branches especially beyond top 15 cities.
III. Alignment of interest of investors, distributors and AMCs
1. In order to have greater and more focused investor education, it was decided that the industry should set apart a portion of the asset management fees annually for the investor education campaign.
2. To avoid differential treatment in the same scheme to different classes of investors, it was decided that all new investors will be subjected to single expense structure under a single plan. However, to be fair to direct investors and promote direct investment, it was decided to have a separate plan for direct investments, with a lower expense ratio.
3. Brokerage and transaction cost chargeable to the scheme for execution of trade to be capped to the extent of 12 bps in case of cash market transactions and 5 bps in case of F&O transactions.
4. In order to help enhance the reach of mutual fund products amongst small investors, who may not be tax payers and may not have PAN/bank accounts such as farmers, small traders/businessmen/workers, cash transactions in mutual fund schemes to the extent of Rs. 20,000/- will be allowed subject to compliance with the Prevention of Money Laundering Act, 2002 (PMLA) requirements as allowed in case of some other financial products.
5. To enable the mutual fund industry to be in line with all other industries where service tax is borne by the end user, it is decided that the service tax payable on investment management fees should be charged to the scheme.
6. It has been decided that for transaction cost of Rs 100/- per transaction of Rs 10,000 and above (or Rs 150/- for first time investor in mutual fund), the option to “opt out” regarding transaction charges shall be on product basis at the discretion of AMC/distributor.
IV. Investor protection – issues of mis-selling and churning
1. In order to encourage long term holding and to reduce churn and align the interests of the AMCs/ distributors with that of the investors, it was decided that (a) the entire exit loads would be credited to the scheme while the AMCs will be able to charge an additional TER to extent of 20 bps. This will not result in any additional cost to the investors. (b) claw back of additional TER (in the case of inflows from cities beyond top 15 cities) would be provided to the extent the investments are redeemed within a period of 1 year.
2. To tackle the issue of mis-selling, the Board decided as follows:
i. Create a system of identification of actual sales personnel of distributors,
ii. Evolve a system of ‘product labeling’
iii. Inclusion of mis-selling as a ‘fraudulent and unfair trade practice’ in SEBI Regulations.
V. Strengthening regulatory framework for mutual Funds
1. AMCs to make monthly portfolio disclosures on their website.
2. In order to provide fair treatment to existing investors of mutual fund schemes, it was decided to harmonize applicability of NAV across various schemes based on the day on which the funds are available for utilization, for an amount equal to or more than Rs. 2 lakhs.
3. Setting up in the near future of a Self-Regulatory Organisation for regulation of distributors.
4. AMCs to disclose half yearly financial results of mutual funds on their websites and an advertisement in this regard would be published in at least one national and one regional newspaper.
5. Additional disclosures like gross inflows, net inflows, average assets under management, ratio of AUM/ gross inflows distributor wise, by the AMCs.
VI. Rajiv Gandhi Equity Savings Scheme (RGESS)
The Board welcomed the Government’s recent announcement of a new scheme called RGESS and decided that SEBI should make a recommendation to the Government suggesting that RGESS may also provide for investments in equity schemes of mutual funds which have the securities allowed under RGESS as the underlying.
VII. Long Term Measures
The Board also felt that like other sectors of the economy where long term policies have been developed, there is a need to develop a policy for mutual funds taking into account its importance in mobilizing domestic savings for the growth of the economy. The policy would include all aspects – including enhancing the reach and promoting financial inclusion, tax treatment, obligation of various stakeholders, etc. Mutual Fund Advisory Committee of SEBI would recommend long-term policy measures after wider consultation with all the stakeholders in a reasonable time frame.
B. Reforms in the Primary Market
SEBI Board undertook a comprehensive review of the extant regulatory framework in the primary market and approved a host of reforms to revitalise the markets, details of which are as under:-
I. For enhancing the participation of retail investors
With a view to increase the reach of IPOs to investors across the country and affording minimum allotment to a larger number of applicants, the following measures have been approved:-
1. To widen the distribution network of IPOs, in addition to the existing channels, the nationwide broker network of stock exchanges at more than 1000 locations will be made available for distributing IPOs in electronic form. Investors can approach any of the brokers in these locations for applying in IPOs, either physically or electronically. The facility of ASBA will also be extended to applicants coming through this mode. Stock exchanges shall provide for download of application forms on their website and shall also facilitate investors to view the status of their applications on their website, similar to secondary market transactions. The brokers uploading the electronic applications form will be adequately compensated by the issuer companies.
2. To further reduce the time taken from issue closure to listing, the reach of ASBA would be enhanced by mandating all ASBA banks to provide the facility in all their branches in a phased manner. Suitable incentive structure to issuers/brokers/banks will be put in place to encourage use of ASBA by retail individual investors.
3. The share allotment system will be modified to ensure that every retail applicant, irrespective of his application size, gets allotted a minimum bid lot, subject to availability of shares in aggregate. The system will satisfy more number of smaller applicants in the oversubscribed issues. The minimum application size for all investors is also being increased to Rs. 10,000-Rs.15,000, as against the existing Rs. 5,000-Rs. 7,000.
II. For facilitating capital raising by issuers
In order to achieve faster completion and simplification of fund raising process, lower the cost of fund-raising, encourage professional/ first generation entrepreneurs, rationalise disclosures in further capital offering documents and enable compliance with minimum public shareholding requirements under SCRR, the following reforms have been approved:-
1. Requirement of average free float market capitalisation reduced from Rs. 5000 Cr. to Rs. 3000 Cr. to facilitate further public offerings (FPOs) and rights issues through fast-track route.
2. To encourage professionals and technically qualified entrepreneurs who are unable to meet the requisite 20% contribution by themselves as promoters will be allowed to meet the same with the contribution of SEBI registered Alternative Investment Funds such as SME Funds, Infrastructure Funds, PE funds, VCFs, etc., subject to a cap of 10%.
3. To facilitate companies to reach minimum public shareholding requirements prescribed under SCRR, additional routes including Rights and Bonus Issue will be permitted. SEBI will also specify other options which may enable (non-compliant) listed entities to reach minimum public shareholding requirements prescribed under SCRR, 1957, subject to appropriate checks and balances. Further, modifications, if any, as may be necessary, to the existing methods, will also be carried out to make them more operable.
4. To allow more flexibility to the issuers, changes upto 20% in the amount proposed to be raised as given in the objects of the issue at the RHP stage, as against the existing 10%, will not necessitate re-filing with SEBI.
5. To facilitate QIPs even in a falling market, issuers will be allowed to offer a maximum discount of 5% to the price calculated as per the SEBI Regulations.
6. To provide updated information to investors, listed entities shall file a comprehensive annual disclosure statement in addition to the existing requirements on the lines of 20F filing prescribed by the US SEC. Such filings, updated by the prospectus, shall also serve as a reference in the offer documents for further capital offerings.
III. For enhancing market integrity and Investor confidence
To ensure quality public offerings, instill discipline amongst issuers/market intermediaries, make the issue process more transparent, provide a level playing field for all market participants and enhance investor confidence, the following reforms have been approved:-
1. To improve the quality of public offerings and enhance investor protection, the eligibility criteria for the issuers coming through the “profitability route” is being redesigned. Now, only issuers with a minimum average pre-tax operating profit of Rs. 15 Crore will be able to come through this route. However, other issuers will continue to access the capital market through either the SME platform or compulsory book building route with increased QIB participation of 75%, as against the existing 50%.
2. In order to protect the interest of investors who may not always be in a position to assess the risks associated with a business model due to complexities involved therein and to ensure that only reasonably credible issuers with adequate disclosures in their offer documents are allowed to access the public issuances route, SEBI will be putting in a place a framework for rejection of draft offer documents. SEBI will also put in place necessary framework for faster clearances of offer documents. This will help reduce repeated queries and resultant delays in dealing with DRHPs by SEBI.
3. Additional mechanisms for monitoring of issue proceeds will be put in place within the extant legal framework.
4. To avoid any misleading signals to retail investors about the extent of subscription in the issue, no withdrawal or lowering the size of bids shall be permitted for non-retail investors at any stage.
5. The price band alongwith relevant financial information shall be published atleast 5 working days prior to opening of the issue, as against the current provision of 2 working days in the case of IPOs. This will provide more time to the market to analyse the issue.
6. To bring more transparency in capital raising, ‘General Corporate Purposes’ as an object of the issue would not exceed 25% of the issue size. Presently, there is no cap on this item.
7. Listed entities shall frame employee benefit schemes only in accordance with SEBI (ESOS and ESPS) Guidelines, 1999. Entities whose schemes are not in conformity with the same would be given time to align with the said Guidelines. Further, such schemes will be restrained from acquiring their shares from the secondary market.
C. Regulations on Investment Advisors
1. The Board approved the SEBI (Investment Advisors) Regulations, 2012 (“Investment Advisors Regulations”) thereby providing a framework for registration and regulation of Investment Advisors (“IA”). The Investment Advisors Regulations have been framed based on consultation with RBI, IRDA, PFRDA and comments received from the public on the concept paper disseminated for this purpose.
2. All individuals, body corporate and partnership firms engaged in the business of providing investment advice to investors for consideration are required to be registered and regulated under these Regulations. Any person who holds himself as an investment advisor shall also fall under the purview of these Regulations. Investment advice given without any consideration through media at large and widely available to the public shall not be considered as investment advice.
3. The banks or body corporates which also offer distribution, execution or referral services will be required to offer investment advisory services through a subsidiary or a Separately Identifiable Department or Division (SIDD). Such a SIDD will be required to be clearly segregated from other activities.
4. Financial Planners will be required to be registered as investment advisors.
5. Only the act of giving advice will be regulated under this regulation, whereas the regulation of selling of products, if any, would be solely under the purview of the product regulators.
6. The investment advisor shall not obtain any remuneration or compensation from any person other than from the client being advised. However, for a bank or body corporate having a distribution, referral or execution business, it would be necessary to keep the investment advisory services segregated from such activities and to make disclosures to the clients being advised about any remuneration or compensation received by it and any of its associates for the distribution, referral or execution services.
7. The investment advisors registered under the regulations shall use the words “investment advisors” in their name.
8. Exemptions have been provided to certain persons from registration under these Regulations, as under:
a. Persons giving general comments in good faith in regard to trends in the financial or securities market or the economic situation provided such comments do not specify any particular securities or investment product.
b. Persons providing advice exclusively in areas like insurance and pension products provided they are regulated by sectoral regulators.
c. Professionals such as lawyers, Chartered Accountants etc., providing advice incidental to their professional services.
d. Stock Brokers, Sub-brokers, Portfolio Managers and Merchant Bankers registered with SEBI providing investment advice incidental to their primary activity. Such intermediaries under SEBI are however required to comply with obligations under these Regulations such as acting in fiduciary responsibility, risk profiling etc.
e. AMFI registered distributors providing investment advice incidental to their primary activity.
f. The Fund Manager of a Mutual Fund or Alternative Investment Fund.
9. The Representatives of body corporate or a bank who provides advice on behalf of a bank or a body corporate need to be qualified and certified.
10. The regulations provide for code of conduct, fiduciary duties, record keeping, risk profiling of the clients and also deal with the issue of suitability and appropriateness of the advice.
11. Requirements relating to experience, qualification, certification and net worth/ net assets have been prescribed for a person to act as an investment advisor. Initially, SEBI will directly register and regulate the Investment Advisors.
D. Amendment of SEBI (Issue and Listing of Debt Securities) Regulations, 2008
1. The Board approved the amendments to Schedule I of SEBI (Issue and Listing of Debt Securities) Regulations, 2008 which lays down the Disclosure Requirement in the offer documents/ memorandum in connection with the Public issue & listing of non-convertible debt as well as privately placed debt securities which are listed or sought to be listed, respectively.
2. The amendments have been carried out based on the discussions held with issuers, merchant bankers, rating agencies and law firms. Major amendments are highlighted below:
a. Following additional disclosures have to be made:
i. Particulars of trustee, auditor, arrangers, registrar and rating agency
ii. Details of changes in capital structure over the last five years
iii. Details of corporate guarantee and commercial paper issued, if any
iv. Details of default and delay in payment on borrowings over the last five years
v. Details of whether debt security is backed by guarantee or letter of comfort, where applicable
vi. Copy of consent letter from debenture trustee
Following requirements have been standardized:
i. Format for presenting financial information
ii. Format for presenting history of equity share capital details
iii. Term sheet with details of covenants on security creation, default in payment and delay in listing.
In case of frequent issues through private placement, an enabling clause for a shelf placement document with a validity of 180 days has been provided.