Meeting Of The SEBI Advisory Committee For Mutual Funds Held On August 12, 1999

SEBI has set up a committee under the chairmanship of Shri.B.G.Deshmukh to advise SEBI on matters relating to the development and regulation of mutual funds in the country. The Committee had its first meeting today and deliberated on various issues relating to mutual funds. The Committee discussed the present status of mutual funds and made the following recommendations to make necessary amendments to the Regulations: (i) Investment restrictions in equity related instruments: Under the existing Regulations no mutual fund under all its schemes can own more than 10 per cent of any company's' paid up capital carrying voting rights. The Committee recommended to restrict the invetments to 10% of the NAV of a scheme in the equity shares or equity related instruments of a single company. However, the limit of 10 per cent shall not be applicable in case of the scheme with an objective of investment in index funds and in case of sector/ industry specific scheme. In such cases, the limt shall be 10% or the weightage of the scrip in the index/sub-index of the sector whichever is higher subject to adequate disclosures in the offer document. (ii) Investment restrictions in Debt securities : According to the Regulations, there are no restrictions on the investments in debt securities of a single issuer. It was recommended to restrict the investment on debt instrument issued by a single issuer to 15% of NAV of the scheme and this limit may be extended to 25% of the NAV of the scheme with the prior approval of the Board of AMC and Board of Trustees. However, this restriction shall not be made applicable to government securities and money market instruments. (iii) Investment in unlisted shares: Presently there is no restriction on the investments in unlisted securities except that no mutual fund shall make an investment in any unlisted security of an associate or group company of the sponsor. The Committee recommended to restrict the investment in unlisted shares to a maximum of 10% of the NAV of a scheme in case of close ended scheme and in case of open-ended schemes the limit may be made more stringent to 5% of the NAV of the scheme as there is continuous repurchase by investors in such a scheme. (iv) Investment restrictions in unrated debt securities : According to the present Regulation, the investments in debt instruments should be made only in rated instruments not below investment grade rated by a credit rating agency. An exception to this is possible with the specific approval of the Board of the AMC, the Committee recommended that the investment of a scheme in unrated debt securities should notexceed 15% of NAV of a scheme and this limit may be extended to 25% provided the AMC gets the prior approval of the board of the AMC and Board of Trustes.. (v) Investments restrictions in listed group companies: Presently a mutual fund can invest upto 25% of the NAV of all of its schemes in the listed securities of group companies of the sponsor. This provision is liable to be misused since it is possible that the mutual fund can invest the entire NAV of any one of the scheme in the group companies and still be within the 25% limit of all its schemes. Therefore, the Committee recommended that such limit of 25% should be for NAV of each scheme separately and not for all theschemes of a mutual fund put together. (vi) Change In Control/Fundamental Attributes In Case Of An Open Ended Scheme: Under the existing regulations incase of change in control and change in fundamental attributes, 3/4th of the unitholders'approval is required. Mutual funds have represented that this clause may be relaxed in the case of open ended schemes as the unitholders have an exit option throughout the life of the scheme. If the investors do not agree to the changes proposed by the mutual fund they can exit at any time at the prevailing NAV. A precondition for such change may be that the unitholders should be informed by way of individual communication and through advertisements in the newspapers. The Committee considered the proposal and found acceptable. (vii) Transactions with Associates: The mutual funds should disclose at the time of declaring half-yearly and yearly results (i) any underwriting obligations undertaken by the schemes of the mutual funds with respect to issue of associate companies, (ii) devolvement, if any, (iii) subscription by the schemes in the issues lead managed by associate companies (iv) subscription to any issue of equity or debt on private placement basis where the sponsor or its associate companies have acted as arranger/ manager. (viii) Net Worth Requirement In Case Of An Asset Management Company: It was decide to elaborate the definition of the Networth for the sake of clarity and uniformity.