Capital Gains for Stock Market

Print Edition: September 2012

In a move to boost the capital market and the mutual fund industry, the Securities and Exchange Board of India (Sebi) has come up with a slew of measures to increase retail participation, give more flexibility to mutual funds and companies issuing initial public offers and encourage distributors.

Some of these steps may, however, result in higher cost for mutual fund investors. Fund houses can now charge a 0.20 percentage point higher fee towards different expenses (also called expense ratio).

This is to compensate them for forgoing the exit load, which was earlier used to pay for distribution and other costs. The entire exit load will now be ploughed back into the scheme . Exit load is usually charged for redemptions within a year of investment.

But some funds charge it for a longer period. Mutual funds can also charge an additional 0.30 percentage point expense ratio for new inflows from smaller towns (other than top 15 cities) if 30 per cent new inflows come from these cities.

At present, mutual funds can charge up to 2.5 per cent expense ratio.

Sebi has also removed the sub-limits on expenses under different heads. At present, mutual funds can allocate a maximum of 1.25 per cent as fund management charge, 0.5 per cent as distribution charge, etc. However, with no sub-limits, they will be free to allocate the 2.5 per cent expense ratio the way they want to.

"This is a pragmatic move," says Waqar Naqvi, chief executive officer, Taurus Mutual Fund.

The regulator has also exempted mutual funds from paying service tax. Now, the service tax (12.36 per cent) will be borne by investors. However, to encourage direct investments, a lower expense ratio is proposed for direct investors.

The capital market regulator has also announced measures to increase retail participation in the primary/IPO market and bring transparency in the whole capital raising process.

Now, investors can apply for initial public offers (IPOs) through electronic mode as well. Stock exchanges have been asked to make application forms available on their websites.

To ensure allotment to more investors, it has been proposed that retail investors get a minimum number of shares irrespective of their application size. The minimum application size for all investors has also been increased to Rs 10,000-15,000 from the existing Rs 5,000-Rs 7,000.

"As the minimum application size has been increased along with assurance that allotment will happen to the extent possible for all investors, interest in the primary market may be rekindled," says P Phani Sekhar, fund manager, PMS, Angel Broking.

To allow investors take more informed decisions, the regulator has said that the company issuing IPOs must announce the price band of the issue at least five working days before the issue opens as against two working days at present.

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