Investing in mutual funds
might become more expensive, but retail investors will be assured of a minimum number of shares in initial public offers as market regulator Sebi
on Thursday announced extensive changes in its rules for MFs and IPOs.
It has also recommended to the government tax benefits to equity MF investors under the proposed Rajiv Gandhi Equity Savings Scheme (RGESS), Sebi Chairman U K Sinha said.
Talking to reporters after a board meeting, Sinha said the board discussed and approved some "very far-reaching reforms" which include steps for expanding the reach of IPOs and MFs across the country.
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) as is the practice at present.
Besides, 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 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.
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, Sinha said.
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 for two days. .
However, the board could not take a decision on having safety net for investors.
Sinha said that various steps taken for revival of mutual fund industry would "impel and motivate AMCs to go beyond the 15 cities".
Regarding the service tax issue, Sinha said that Sebi's impression is that the impact will not be more than 2-3 basis points on investors and this is already a practice in various other sectors, including the financial sector.
Sinha said Sebi board has taken various decisions to revive the mutual fund industry, as per which the total expense ratio would be made fungible by removing the existing sub-limits in these charges.
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.
The Sebi board has also decided certain steps 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 per cent of their net sales take place beyond the top 15 cities.
In order to increase the reach of MFs, some other decisions have also been taken including flexibility in charging of transaction cost, Sinha said.
Besides, Sebi has also decided to set up an SRO (Self Regulatory Organisation) to look after the mutual fund distribution business. Also, the fund houses would have to follow a broader set of disclosure norms, Sinha said.
Also, Sebi has now decided to put a cap of 25 per cent 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.
In a move that could help investors, Sinha said, the board has decided to recommend to the government for making equity MFs eligible for tax benefits under the RGESS.
"In the long run, a policy needs to be made for MFs and a committee would be set up to develop mutual fund policy of the country," Sinha said, while adding that the committee would finalise its recommendations in about six months.
Regarding e-IPO, Sinha said it has been decided that these facilities would be provided in more than 1,000 places through broker terminals to provide electronic or physical filling of IPO forms.
Sinha said that systems have been designed for this and brokers would be compensated for this.
Regarding ASBA (Application Supported by Blocked Amount), wherein the money lies in applicant's account till shares are allotted, Sinha said this facility would be made available in a larger number of places and in all bank branches.
The minimum application limit in IPOs has also been raised from Rs 5,000-7,000 to Rs 10,000-15,000, he said.
In the long run, the aim to have almost all or a vast majority of IPOs to have ASBA facility, Sinha said.
To attract more and more retail investors to IPOs, Sinha said the rules are being changed to ensure a minimum lot of shares to all the retail investors applying for shares.
Sinha said Sebi has been criticised in the past for delay in dealings with offer documents and therefore it has decided to instill some self-discipline for faster processing of the documents.
"There will be certain criteria approved by the board for offer documents. Sebi board has approved certain norms in this regard. Sebi can reject certain offer documents based on certain criteria and in a certain time frame in a very expeditious manner, the offer documents' views will be taken," he said.
Sinha said there has been some level of uncomfort in Sebi about companies raising funds for general corporate purposes.
"There will be a cap on how much can be raised for these purposes and that cap would be 25 per cent," he said.
Regarding the regulation of investment advisers, Sinha said Sebi had floated a paper on the issue about a year ago.
"After discussions with RBI, IRDA and PFRDA, Sebi has decided to start and implement investment advisor regulation.
This regulation would be in concurrence with all other regulators," he said.
"As per the mechanism, is that a bank, for instance, will have to set up a separate subsidiary or a separate identifiable division or department... They well have to be registered as investment advisers and would need to have minimum capital requirements," he said. .
Sebi also decided to make available new avenues like bonus and rights issues for promoters to attain a minimum public float of 25 per cent. But will not be issued to promoters' group.
The promoters can now offload 10 per cent out of the mandatory 20 per cent to alternate investment funds, while in compulsory book building process, QIB bid limit has been increased to 75 per cent from 50 per cent
Sinha said that the "philosophy behind this (regulating investor advisers )is that if anybody is providing advice for a fee, they would be regulated. If somebody is not providing for a fee, they will not be regulated."
"They can, in their business communication, use the word investment advisers," he said, while adding that the financial advisers would be allowed to act as investment advisers.
"There are certain other categories like alternative investment funds might be giving advise even though it might not be their primary business. They are not covered and can continue with their work without getting registered with Sebi," he said.