The Securities and Exchange Board of India (Sebi) has asked the mutual fund (MF) sector to disclose salaries of all top employees’ as well as of those whose annual remuneration is equal to or above Rs 60 lakh per annum.
The market regulator has also asked fund houses to publish disclosures with regard to commissions paid to distributors and the expense ratio. The regulator also wants fund houses to reduce reliance on credit agencies and develop their own in-house systems to assess credit risk.
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Additionally, it wants details of the ratio of CEO’s remuneration to the median remuneration of other employees. The details have to be furnished one month from the end of the every financial year effective 2015-16.
Every six months, fund houses will have to inform it of the commission paid to distributors (in absolute terms) during the half-year period against the investors’ total investments in each scheme. This will be done through the Consolidated Account Statement (CAS) issued to investors.
Commission will include direct monetary payments and payments through gifts, trips and event sponsorships. The CAS will disclose the scheme’s average total expense ratio (in percentage terms) for the half-year period.
Additionally, each CAS will provide the total purchase value divided by the cost of investment in each scheme.
Sebi has asked for disclosures on ‘soft-dollar’ loans and has restricted them to only benefits that are in the interest of investors. Soft-dollar loans refer to an arrangement between a fund house and brokers in which the former executes trades through a particular broker in an exchange for free research, hardware, software or non-research related services.
“The move to disclose commissions will help investors understand their cost structure but will destroy the business of distributors. Investors will now start questioning distributors on their fees and it will put tremendous pressure on them to justify their rates,” said Dhirendra Kumar, CEO, Value Research, a fund tracker. Kumar, however, added that disclosing salaries would not be of much help to investors.
Mutual funds will now be allowed to deploy proceeds of any new fund offering in collateralised borrowing and lending obligation (CBLO), a money market instrument. AMCs cannot charge fees on funds deployed in CBLOs during the NFO period and appreciation will have to be passed on to investors. Further, in case the minimum subscription amount is not garnered by the scheme during the NFO period, the interest earned shall be returned to investors along with refund of the subscription amount.
There will be additional disclosures required in offer documents such as scheme information document (SID) and key information memorandum (KIM) for existing and new schemes. Disclosures include the period for which the fund manager has been managing a particular scheme, the scheme’s portfolio holdings, including top 10 holdings by issuer, and fund allocation towards various sectors. The SID will also provide a simple illustration of the impact of expense ratio on the scheme’s returns.
MFs will be required to have a dashboard on their website providing performance and key disclosures pertaining to each scheme managed by the fund house. The information should include the scheme’s AUM, investment objective, expense ratios, portfolio details, scheme’s past performance, among others.
MUTUAL FUNDS UNDER SCRUTINY
- Sebi directs mutual funds to disclose commissions paid to distributors
- Like listed companies, MFs to disclose annual salary of those earning Rs 60 lakh or above, and also the ratio of CEO’s remuneration to median employee salary
- Fund houses will have to disclose the ratio of the total purchase value and the cost of investment in Consolidated Account Statement
- MFs to provide additional disclosures in their scheme documents, including the tenure for which a fund manager has been managing the scheme, the portfolio holdings, and the impact of expense ratio on scheme’s returns
- MFs website to provide performance and key disclosures pertaining to each scheme, including assets under management, investment objective, expense ratios, portfolio details and past performance