SEBI revises mutual fund circulars/guidelines

SEBI vide circular SEBI / IMD / CIR No 14 / 187175/ 2009 dated December 15, 2009 has amended the various existing SEBI circulars for mutual funds. This circular was issued as a part of SEBI’s continuing efforts in relation to investor protection, market development and effective regulation. The major changes effected by this circular are as follows: -

Payment of interest for delay in dispatch of dividend warrants

SEBI has stated that in the event of failure of dispatch of dividend warrant within the stipulated 30 day period, the AMCs should to pay interest @ 15 per cent per annum to the unit holders. Such incidents should also be reported to SEBI as a part of the compliance test reports.

Valuation of collateral securities for the participation by mutual funds in the securities lending scheme

Earlier in 1999 SEBI had issued detailed guidelines for the securities lending by mutual funds. Now SEBI has deleted clause 2 of these guidelines in relation to the ‘valuation of collateral securities’ and advised mutual funds to comply with guidelines issued in this regard by SEBI/ Stock Exchange from time to time.

Consolidation of schemes

In cases of merger or consolidation of schemes, mutual funds have to give the unit holders an option to exit the scheme at prevailing NAV without exit load. Now SEBI has mandated that a report in this regard containing information on total number of unit holders in the schemes and their net assets, number of unit holders who opted to exit and net assets held by them, and number of unit holders and net assets in the consolidated scheme, should be filed by the AMC with SEBI within 21 days from the date of closure of the exit option.

Launch of additional plan under existing schemes

SEBI has replaced its earlier circular on ‘launch of additional plan under existing schemes’ with a new circular. The highlights of the new circular are as follows:-

• Additional plans sought to be launched under existing open ended schemes which differ substantially from that scheme in terms of portfolio or other characteristics should be launched as separate schemes in accordance with the regulatory provisions.
  

• Additional plans which are consistent with the characteristics of the scheme may be launched as additional plans as part of existing schemes by issuing an addendum.

Guidelines for advertisement by mutual funds

The definition of ‘Tombstone advertisement’ has been changed and now this form of advertisement can only give basic information about a mutual fund registered with SEBI whose Statement of Additional Information has been filed with SEBI and has been uploaded on SEBI website.

A copy of the circular is available here.

SEBI says no to ‘NoC’ – Fund houses cannot insist on no-objection certificate for change of distributor

SEBI vide circular SEBI/IMD/CIR No./ 13/187052 /2009 dated December 11, 2009 has directed AMCs to change the fund distributor of an investor on receiving an instruction from investor informing his desire to change the existing distributor. AMCs cannot compel the investor to obtain an NoC from the existing distributor for this purpose. SEBI observed that the inconsistent practices prevailing in the industry is causing hardship to investors and AMCs should stop this practice immediately.

Earlier in September, 2007 Association of Mutual Funds of India (AMFI) had directed AMCs to end the practice of insisting an NoC from the existing distributor for change of distributor. However, fund houses have ignored AMFI’s circular, saying that this is not mandated by SEBI. Now SEBI has cleared the air by clarifying that AMCs cannot compel the investor to obtain an NoC from the existing distributor.

A copy of the circular is available here.

AMCs should maintain all the documentation (KYC, PoA etc.)

SEBI vide circular SEBI/IMD/CIR No.12 /186868 /2009 dated December 11, 2009 has reiterated that the requirements mentioned in the SEBI master circular on anti money laundering (covered in this blog here) are applicable to the Mutual Funds/ AMCs. Hence AMCs should maintain all the documentation pertaining to the unitholders/investor including Know your Client (KYC)details and Power of Attorney (PoA).

Recently SEBI had noticed that documentation related to the investor including Know your Client (KYC) and Power of Attorney (PoA) in respect of transactions/requests made through some mutual fund distributors is not available with the AMC/RTA of the AMC. AMCs stated that these documents are maintained by the respective distributors. It is in this context that SEBI has asked AMCs to maintain all the documents and advised them to take immediate steps to obtain all investor/ unit holders documents in terms of the AML/ CFT, including KYC documents / PoA as applicable. SEBI has also directed AMC’s to stop payment of any commissions, fees etc. to defaulting distributors till the full completion/compliance of the SEBI mandate.

A copy of the circular is available here.

ASBA Phase II – Facility extended to HNIs and corporate investors

SEBI vide PR No.386/2009 dated December 10, 2009 has extended the ASBA (Application Supported by Blocked Amount) facility to investor categories like High Networth Individuals (HNIs), corporate investors etc. (referred as ASBA Phase II). Thus all investors, except Qualified Institutional Buyers (QIBs) will be eligible to apply for public / rights issues using ASBA facility. The restrictions placed on investors under ASBA Phase- I viz. that only retail investors can apply and that too only at cut-off, that there shall be not more than one bid, that bids cannot be revised etc. will no longer be there under ASBA Phase II. ASBA Phase II will be applicable to all the issues opening on or after January 01, 2010.

SEBI in August, 2008 had introduced the new mode of payment in public issues called ASBA (now referred to as ASBA phase I), wherein the application money remains blocked in the bank account till allotment. Later in August, 2009 SEBI had extended the ASBA facility to rights issue. This decision was in furtherance of the SEBI’s decision to cut short the time period for allotment of shares in rights issue to 15 days from the previous 45 days. The application forms for this payment mode are to be submitted to banks whose names appear in the list of Self Certified Syndicate Banks on the SEBI website. Since the introduction of ASBA, it has been implemented in more than twenty issues.

A copy of the press release is available here.

Stock exchanges and members to preserve records for a longer period in specified cases

SEBI vide circular MRD/DoP/SE/Cir- 21 /2009 dated December 9, 2009 has asked stock exchanges and its members to preserve and maintain originals of documents (if a copy of such document has been collected by enforcement agencies like CBI, Police, Crime Branch etc. for the purpose of their investigation) till the trial or investigation proceedings have concluded. As per the current regulations every stock broker should preserve the specified books of account and other records for a period ranging from two to five years.

It should be also noted in this context that the Prevention of Money Laundering Act, 2002 requires stock brokers and sub brokers to maintain their records for a period of ten years from the date of cessation of transactions between clients and brokers / sub brokers.

A copy of the circular is available here.

SEBI amends client broker agreement

SEBI vide circular MIRSD/SE/Cir-19/2009 dated December 3, 2009 has come out with a new set of compliances for stock brokers to instill greater transparency and discipline in the dealings between the clients and the stock brokers.

Background

Clients contact a broker or a sub broker registered with SEBI for carrying out their transactions pertaining to the capital market. A broker is a member of a recognized stock exchange, who is permitted to do trades on the screen-based trading system of different stock exchanges. He is also enrolled as a member with the concerned exchange and is registered with SEBI.

Clients sign the ‘Member - Client agreement’ with the broker for the purpose of engaging that broker to execute trades on behalf of the clients from time to time. In case they are dealing through a sub-broker then the client will have to sign a ‘Broker - Sub broker - Client Tripartite Agreement’. These agreements contain clauses defining the rights and responsibility of Client vis-à-vis broker/ sub broker.

New compliances

• Stock brokers should maintain a book containing all the mandatory and non-mandatory documents required for registering a client. The folder/book should have an index page listing all the documents contained in it and indicating briefly significance of each document. Once the agreement is signed, a copy of the same shall be made available to the client.
• This book should mandatorily contain the member-client agreement, know your client (KYC) form and the risk disclosure document.
• The client should indicate in the agreement, the stock exchange as well as the market segment where he intends his trades to be executed.
• The existing KYC form should to suitably modified to capture the identity and the address of the introducer instead of his MAPIN/UID.
• Broker should also have documentary evidence of financial details provided by the clients who opt to deal in the derivative segment.
• Broker should mandatorily have documents containing policies and procedures for dealing with issues like refusal of orders for penny stocks, setting up client’s exposure limits, applicable brokerage rate, imposition of penalty/delayed payment charges by either party, the right to sell clients’ securities or close clients’ positions without giving notice to the client on account of non-payment of client’s dues etc.
• On running account authorisation, the regulator said the settlement of funds and securities should be done within 24 hours of the payout, unless otherwise specifically agreed to by the client. The authorisation should be renewed at least once a year and should be dated.

More compliances and a copy of the circular is available here.