SEBI has recently issued a paper on the Long Term Policy for Mutual Funds discussing wide ranging issues surrounding the mutual fund sector and has recommended various measures to improve penetration of mutual funds in India.

Tax incentives: SEBI has recommended tax exemptions of upto Rs. 50,000 under Section 80C of the Income Tax Act for investments in long term mutual fund products like the Mutual Fund Linked Retirement Plan or, in the alternative, increase of the tax exemption limit under Section 80C to Rs. 2,00,000 and include investments in ELSS, MFLRP within that limit in order to channelize investments into long term mutual fund products.

Employee Provident Fund Organizations: SEBI has recommended that the Labour Ministry permit all Employee Provident Fund Organizations to invest upto 15% of their corpus in long term mutual fund schemes. In what could be a game changer in the EPF space, it has been recommended that employees/contributors now be offered an option for investing a part of their corpus in a long term mutual fund product of their choice for 10 or 15 years. This is along the lines of the 401(k) benefit plans available for the workforce in the US. However, given the ultra cautious approach taken by the government in the past, it is unlikely for such a recommendation to be implemented.

Central Public Sector Enterprises: Further, SEBI has recommended that all Central Public Sector Enterprises be allowed to invest their surplus funds, which run into trillions of rupees, in SEBI registered mutual funds, as opposed to just public sector mutual funds under existing laws. These measures would provide incentives for the public to invest in mutual funds, as well as improve liquidity in the capital markets.

Capital Adequacy: SEBI has also increased the minimum net worth for AMCs from Rs. 10 crores (Rs. 100 million) to Rs. 50 crores (except Infrastructure Debt Funds) within the next three years. This appears to be a move without any purpose and appears to be an anticompetitive move against smaller players, many of whom have performed better than their larger peers. SEBI has also mandated that AMCs invest atleast 1% of their funds as seed fund in schemes promoted by them, which would also be counted towards computing their net worth. The AMCs will be required to maintain its seed capital in all schemes, except closeended schemes and have been given a year to comply. This also does not appear to have been well thought as it rewards bigger players rather than smarter players.

Disclosures: SEBI has also sought to improve quality of disclosures made by mutual funds by asking them to disclose their voting pattern on a quarterly basis, as well as provide other information pertaining to the AUM regularly on their websites. This would be a good move towards improved corporate governance in India.

Distribution through PSU banks: In a bid to improve distribution channels, SEBI has also recommended that PSU banks be allowed to distribute all mutual fund products, as well as tap the internet to distribute products online.

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Date:September 28, 2015