SEBI’s New Guidelines for MF and IPO

SEBI has announced much awaited measures today for reviving IPO and mutual funds. But many of them will have no effect, as there are no gain for mutual fund investors at all as market regulator SEBI announced extensive changes in its rules for MFs and IPOs.

Major Decisions in MF:

In a major decision that could make it expensive for investors to put money in mutual funds, SEBI decided that any service tax would be charged to ultimate investor, not to the asset management company (AMC).

Now onwards the AMCs would be allowed to charge additional expense ratio (the charge levied by fund houses towards fund management fees and other expenses) for catering beyond a threshold limit in the smaller cities. The SEBI board has decided to promote sales of mutual funds beyond the top 15 cities. The fund houses would be allowed additional 20 basis points expense ratio if 30% of their net sales take place beyond the top 15 cities.

The various decisions also include allowing mutual funds flexibility in using fund expense charges and said a committee is being set up to frame a national mutual fund policy.

Also, the exit load will be credited back to the scheme, as against the current practice of it being given back to the AMC. While it would not add any costs to investors, the move would help stop large-scale churning amongst the schemes.

Major Decisions in IPO:

SEBI decided that a minimum lot of shares would be assured to retail investors in IPOs. It also approved e-IPO procedure for electronic bidding in public offers to help investors across the country bid for shares in a cost-effective manner.  The regulator would also frame new rules for investment advisers.

Among other decisions, non-retail investors cannot withdraw or reduce their price or offer size in IPOs, but can enhance the same, as is the rule for retail investors.

For companies coming out with IPOs, they would now have to disclose the price band at least five working days before the opening of the bidding, as against the current norm of two days.

SEBI has now decided to put a cap of 25% of IPO size to the funds for general corporate purposes. Currently, there is no such cap.

SEBI also decided to fast-track clearance to public offer documents of companies and said it would frame clear rules for rejection of offer documents.

Besides, SEBI has also decided to set up an SRO (Self Regulatory Organisation) to look after the mutual fund distribution business. However, the board could not take a decision on having a “safety net” for investors.

SEBI  has also recommended to the government tax benefits to equity MF investors under the proposed Rajiv Gandhi Equity Savings Scheme (RGESS). 

Investing in mutual funds (MFs) might become more expensive, but retail investors will be assured of a minimum number of shares in initial public offers (IPOs).None of these measures will either expand the market bringing in more retail investors nor would it give greater confidence to the shrinking investor population in the country.

Regards,

Arvind Trivedi

Certified Financial Planner

arvind.trivedi79@gmail.com