Shell out more for MF investments All Retail IPO Investors To Get Shares As Sebi Changes Key Norms

Mumbai: Market regulator Sebi on Thursday made several changes to the rules governing MFs, IPOs and fund distributors that would make mutual fund investments more expensive but at the same time give a guaranteed minimum number of shares to retail investors during an IPO. 

    The measures announced by Sebi, which is aimed at arresting the slide in sales of mutual funds and expanding the retail investor base, also included relief for companies struggling to meet the minimum public holding norms of 25% when it allowed them to issue bonus and rights shares to meet the requirements. Besides, the regulator also cleared the ground for e-IPOs, which could cut down the time taken between close of an offer and listing from 12 days to 5 days. The government had mandated that by June 2013 promoters of listed companies should not hold more than 75% stake. 
    Announcing the measures, Sebi chairman U K Sinha said that it has recommended to the government to offer equity mutual fund investors the same benefit of taxation proposed under the Rajiv Gandhi Equity Savings Scheme. It is believed that some of these measures could lift the morale of the mutual fund industry which has been crippled for the last three years after Sebi banned entry load. Sebi has offered MF houses incentives to expand beyond the metros and big cities. Sebi also wants 100% of applications in each public offer to come through ASBA, a system where each application is backed by funds blocked in the applicants' bank accounts. Upon allotment, only that part of the blocked amount from the bank account is released which is required to meet the shares allotted to the investor. "e-IPO, additional incentive for ASBA applications, increase in retail minimum application size and tweaking of the allotment for retail investors are steps that will increase retail participation from across the country, which is now restricted to the top 20-25 cities," said Ankush Pitale, MD, equity capital markets, Religare Capital Markets. 
    Sebi also allowed full fungibility of expenses that fund houses charge investors. At present, MFs charge between 1.75% and 2.5% of the total investors' money they manage, with sub-limits for fund management, marketing, distribution, custodial charges etc. From now on these sub-limits will not be applicable, and fund houses will be allowed to spend any amount under these heads while maintaining the overall expense ratio at the given level. Industry officials said that bigger fund houses would gain an advantage over smaller ones since given their large assets under management (AUM), they may get more funds for marketing to bring in even more funds. 
    The regulator decided that fund houses which bring in long-term money from smaller towns should be incentivized. It allowed fund houses to charge additional expense costs of up to 30 basis points, provided up to 30% of their new inflows come from locations beyond the top 15 cities. At present, about 90-95% of the industry's AUM comes from the top 15 cities. "This new structure of target-based incentives for fund houses is an innovation which has not been experimented anywhere else in the world. This would definitely increase mutual fund penetration in the country," said Milind Barve, MD, HDFC Mutual Fund. 
    Sebi also said that service tax that fund houses pay to the government, which is charged on the asset management fees only which is about 1.25% of AUM, and not on the whole expense costs, will now be charged to the investors. This, in effect would increase cost to investors by about 16 paise for every Rs 100 invested in funds. 
    Besides, to compensate long term investors for the indirect cost they bear for the exit of short term investors from a scheme, the regulator allowed exit loads collected from investors exiting a fund within a year to be ploughed back into the scheme. Earlier this cost went to the fund house. However, it allowed fund houses to charge 20 basis points from the scheme. Sebi expects this will be cost neutral to investors as well as fund houses. Taken together these decisions may increase costs by 15-20%, or between 38 paise and 50 paise per Rs 100 for investors. Analysts feel the benefits outweigh the extra costs. "The marginal utility from these decisions would be much higher than the extra costs that investors have to now bear," said Dhirendra Kumar, CEO, Value Research, the leading fund analytics company in the country. 
    Among all the decisions, there is one which can create some problem for distributors as well as fund houses. Sebi said that to promote direct investment in MFs, it has decided to have a separate plan for direct investments, with a lower expense ratio. This may lead to lower dependence on distributors and also different NAVs for the same scheme, which in turn could increase accounting costs and confusion, industry veterans said. In its bid to protect investors from unscrupulous investment advisors, it also mooted the creation of a regulator for the mutual fund distributors and investment advisors. 
WHAT IT MEANS FOR... 
INVESTORS 
tWill have to pay service tax on fund management charges (earlier fund houses paid it) 
tWill be charged up to 30 basis points more for rural expansion by the fund house in whose scheme they are invested in 
tShort-term investors pulling money out within a year will have to pay 20 basis points in exit load which will be credited to the scheme, so short-term investors will compensate long-term investors tSelf-Regulatory Organisation (SRO) proposed for distributors to improve services, reduce mis-selling te-IPO aims to ensure listing within a week after closing of an issue tBonus issues for non-promoting shareholders to meet govt's 25% non-promoter shareholding rule to benefit retail investors as they can increase their shareholding without spending anything 
FUND HOUSES 
tMore funds at their disposal and also more freedom to spend what they have 
tTarget-based incentive structure for expansion beyond the big cities that account for about 90% of industry assets 
tAllowed to accept investments of up to Rs 20,000 without PAN 
COMPANIES 
tAllowed to issue rights, bonus shares to non-promoting shareholders to meet listing norms tFaster payment, less paper work in public offers 
MF DISTRIBUTORS 
tBetter remuneration from fund houses tWill be regulated through an SRO structure for better service, less mis-selling