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All you need to know about Sebi's market reforms

All you need to know about Sebi's market reforms

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. Will it help?

Dipak Mondal
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.

After days of speculation, the regulator finally announced steps to get the mutual fund industry out of the woods by allowing higher charges towards expenses and better cost management. 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 (also called expense ratio) towards different expenses. 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 Tier II and Tier III cities (other than top 15 cities) if 30 per cent new inflows come from these cities.  This is aimed at promoting mutual fund penetration in smaller towns and 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.

In another important move, Sebi has proposed that units will be allotted at the net asset value of the day on which the payment is realised. This is for investments above Rs 2 lakh.

"Corporate investors usually make pay through cheques, which take at least a day to be encashed. However, they are allotted units at the NAV of the day on which the request is made, thus allowing them an extra day's benefit, at the cost of existing investors," explains Surjit Mishra, executive vice-president and national head, mutual funds, Bajaj Capital.

RETAIL PARTICIPATION IN IPOs
The capital market regulator has also announced measures to increase retail participation in the primary/IPO market.

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. Brokers uploading the electronic applications form will be compensated by the companies.

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.

"After the IPO application, retail investors were unsure of the allotment. 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 as many investors had turned cynical towards applying for good issues," 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.

Easing the norms for follow-on public offers (FPO), Sebi has reduced the requirement of average free-float market capitalisation from Rs 5,000 crore to Rs 3,000 crore. Besides, to help companies comply with the 25 per cent minimum public shareholding norm, Sebi has allowed companies to do so through rights and bonus issues.

Change in issue size to the extent of 20 per cent of the original issue can be made without the need for re-filing with Sebi. This will save a lot of time and resources in mobilising IPO proceeds.