INVESTMENT MANAGEMENT DEPARTMENT
SEBI/ IMD/CIR No. 8/5611/ 2004
March 19, 2004
All Mutual Funds Registered with SEBI Association of Mutual Funds in India (AMFI)
Re.: Uniform cut-off timings for applicability of Net Asset Value (NAV) of Mutual Fund scheme(s)/plan(s).
SEBI had come across reports in a section of media about ‘late trading’ in Mutual Funds, in some countries where undue advantage was taken by a few investors due to different cut-off timings for applying NAVs both for subscriptions and redemptions, to the disadvantage of other investors.
As a proactive measure, keeping in view the interests of investors, SEBI had initiated a dialogue with the Mutual Funds industry in India including AMFI for adopting an uniform cut-off time for applying NAVs both for subscriptions and redemptions, across the industry. Taking into account the inputs received in this regard, the following guidelines are being issued:
Applicability of these guidelines
These guidelines shall be applicable to all the schemes/plans of Mutual Funds whether existing or new.
However, considering the nature of International Funds (i.e. the mutual fund scheme(s) having substantial investments in foreign securities which are valued as per time zones other than the Indian Standard Time zone), the same are not covered by these guidelines.
These guidelines shall also not apply to the transactions in the units of Mutual Funds undertaken through the stock exchanges.
Cut off timings
A) Mutual Fund Scheme(s)/plan(s):
Only forward (i.e. prospective) NAV shall be applied to all scheme(s)/ plan(s) of Mutual Funds as per the details given below:
In respect of valid applications received upto 3 p.m. by the Mutual Fund alongwith a local cheque or a demand draft payable at par at the place where the application is received, the closing NAV of the day on which application is received shall be applicable.
In respect of valid applications received after 3 p.m. by the Mutual Fund alongwith a local cheque or a demand draft payable at par at the place where the application is received, the closing NAV of the next business day shall be applicable.
However, in respect of valid applications with outstation cheques/ demand drafts not payable at par at the place where the application is received, closing NAV of the day on which cheque/demand draft is credited shall be applicable.
Having regard to the above, Mutual Fund shall ensure that each and every payment instrument for subscription is banked with utmost expedition at the first opportunity, given the constraints of banking hours, prudently utilising every available banking facility (e.g. high value clearing, account transfer etc.). Any loss in NAV incurred by the investor/ scheme/ plan on account of delays, shall be made good by the Asset Management Company (AMC).
In respect of valid applications received upto 3 p.m. by the Mutual Fund, same day’s closing NAV shall be applicable.
In respect of valid applications received after 3 p.m. by the Mutual Fund, the closing NAV of the next business day shall be applicable.
In view of the above, the Mutual Fund shall ensure that there is an uniformity in time taken for issuing redemption proceeds to all investors.
However, considering the nature of Liquid schemes/plans, NAV shall be applied to Liquid schemes/plans as per details given at (B) below.
B) Mutual Fund – Liquid Fund Scheme(s)/plan(s) :
The scheme(s)/plan(s) by whatever name called and having characteristics as detailed in annexure to this circular with regard to their portfolio would be treated as Liquid Fund scheme(s)/plan(s). In respect of the Liquid Fund scheme(s)/plan(s), the Cut-off timings for applying NAV shall be as follows:
In respect of valid applications, closing NAV of the day immediately previous to the day on which funds are available for utilization by the fund shall be applicable. However, in respect of any application received after 1 p.m. by the Mutual Fund and the funds are available for utlisation by the fund on the same day, closing NAV of the same day shall be applied.
In respect of valid applications received upto 10:00 a.m.,by the Mutual Fund, previous day’s closing NAV shall be applicable. In respect of valid applications received after 10:00 a.m. by the Mutual Fund, same day’s closing NAV shall be applicable.
For liquid schemes/plans Mutual Fund shall calculate NAVs for every calendar day.
Valid applications for “switch out” shall be treated as redemptions and for “switch in” shall be treated as purchases and these guidelines shall be applicable, accordingly.
With regard to the liquid scheme(s)/plan(s) in which investment is “switched in” it is reiterated that the provisions mentioned in Para 2 (B) shall be applicable.
4.Investment through “Sweep” mode
For removal of doubt, if any, it is clarified that these guidelines shall also be applicable to investments made through “Sweep” mode.
5.Evidence of acceptance through time stamping
Mutual Funds shall disclose “official” points of acceptance of transactions in its offer documents and its web-site. The “cut off time” as mentioned in these guidelines shall be reckoned at these official points. All purchase and redemption applications must be demonstrably received by the Mutual Fund at these “official” points of acceptance of transactions. All these official points must have time stamping machine(s). For a given machine, the running serial number would be stamped from the first serial number of the machine and continue to be stamped upto its maximum capacity. Only, thereafter the cycle would be repeated.
Each and every application for the purchase and the corresponding payment instrument shall be stamped on the face and back respectively, indicating the date & time of receipt and running serial number.
The running serial number on the application and the corresponding payment instrument shall be same.
Each and every request/application for redemption shall be stamped on the request/ application and on the investor’s acknowledgement copy (or twice on the request/application if no separate acknowledgement is issued), on the face, indicating the date & time of receipt and running serial number.
Bunching of applications by giving single serial number shall not be permitted.
The time stamping machine should have a tamper proof seal. For maintenance/ repairs, the ability to open the seal must be limited to the vendor or nominated person(s) of the Mutual Fund and proper record shall be maintained. Any breakage of the seal and/or breakdown of the electronic time stamping process must be duly recorded by the Mutual Fund and reported to the Trustees. There must be a process of verifying the accuracy of the time being stamped in such situations.
While every effort shall be made to ensure uninterrupted functioning of the time stamping machine, in case the machine develops a technical snag, the mutual fund shall take prompt action to rectify the situation. During that period, the mutual fund shall adopt an alternative method of time stamping applications which has already been approved by the Board of AMC and trustees. An audit trail shall be available to check and ensure the accuracy of time stamping process during the said period.
Any alternate methods of transaction adopted by the Mutual Fund that are not paper based or do not have an electronic trail (e.g. phone, SMS etc.) shall be converted into a physical piece of instruction and time stamped in accordance with the above guidelines.
The Mutual Fund shall maintain and preserve all applications/requests, duly time stamped as aforesaid, so as to produce them as and when required by SEBI or auditors appointed by SEBI at least for a period as defined under Regulation 50 (2). No blank document shall be time stamped. Genuine errors, if any, during the time stamping shall be recorded with reasons and the corresponding applications/requests shall also be preserved as above.
6.Implementation of these guidelines
These guidelines for assigning NAV shall come into force as soon as possible but not later than March 25, 2004.
However, the guidelines pertaining to time stamping machines shall be implemented by the mutual funds in a phased manner within the following timeframe:
For all metropolitan centres (i.e. Mumbai, Delhi, Chennai, Kolkatta) and other centres which constitute atleast 60% of the value of the business of the mutual fund, as soon as possible but not later than May 15, 2004.
For the remaining Centres, as soon as possible but not later than June 15, 2004.
7.Compliance and reporting to SEBI
The compliance of the above mentioned requirements shall be reported to SEBI in all the quarterly compliance reports as well as the half yearly trustee reports. The trustee reports should specifically mention whether the trustees are satisfied with the systems and procedures of the mutual fund for the purpose of adhering to these guidelines.
Mutual Funds shall issue an addendum detailing aforesaid provision, if these provisions result into changes in the disclosures already made in the offer documents.
Mutual Funds, shall inform SEBI about the names of their schemes, which fall under the category of “Liquid schemes/plans”, latest by March 23, 2004.
All offer documents filed with SEBI from the date of issue of this circular shall contain disclosures in accordance with these guidelines.
These guidelines are being issued in accordance with the provisions of Regulation 77 of the SEBI (Mutual Funds) Regulations, 1996.
The scheme(s)/plan(s) having following characteristics with regard to its portfolio would be treated as Liquid Fund scheme(s)/plan(s):Mark-to-Market component of the fund on a weekly average basis is less than 10%.
(Mark to Market would mean the valuation of an asset (e.g. marketable securities, derivatives and other financial contracts) using a traded price or a derived price from the corresponding yield curve).andMaximum repricing tenor of 1 year reckoned as under:
For a fixed rate asset, the remaining tenor is 1 year or less.For a floating rate asset, the interest reset frequency is 1 year or less.For a fixed rate/floating rate asset where the principal is paid in a staggered and/or on amortizing basis (e.g. securitized papers), the average maturity of such an asset is 1 year or less.or a portfolio using Interest Rate Swaps,
the composite floating rate asset (underlying fixed rate asset and Interest Rate Swap, paying fixed and receiving floating) has interest reset frequency upto 1 year.If Interest Rate Swaps (receiving fixed and paying floating), have been used to convert a floating rate asset into a fixed rate asset, the fixed leg of the Interest Rate Swap having remaining tenor upto 1 year.For a portfolio using Forward Rate Agreements, the summation of the beginning and end dates of the period covered is 1 year or less.i f there are positions in Interest Rate Futures and Bond Futures, the repricing risk is 1 year or less.
The aforesaid requirement shall be disclosed in the offer document and would form part of the investment allocation pattern. Any deviation from these requirements shall be viewed as violation of investment restrictions.