On September 17, 2020, SEBI issued a circular wherein some of the norms applicable to mutual funds were modified. Some of these changes, which are applicable from January 01, 2021, are discussed below:
Revised norms related to Net Asset Value (NAV)
With effect from January 01, 2021, the closing NAV for allotment of units with respect to all investments in mutual fund schemes, other than liquid and overnight schemes, will be the date on which the amounts invested are realised by the mutual fund. Under the present framework, as provided under SEBI’s circular dated September 13, 2012, the NAV as on the date of realisation of funds is applicable only with respect to investments of INR 2 lakh and above. For investments less than INR 2 lakh, the NAV of the same day on which the investment is made is applicable, provided such investment is made before the cut-off time, i.e. 1 p.m. for equity funds and 12.30 p.m. for debt funds. Further, for investments less than INR 2 lakh, that are made after the cut-off time, the NAV as on the next day is applicable.
In order to provide a level playing field to investors across all schemes, SEBI has now stated that the NAV as on the date on which the asset management company (AMC) receives the investment shall be considered for the purpose of investment in all schemes, except for liquid and overnight schemes, irrespective of the time or size of the investment. However, this move may largely impact investors who make investments through cheques, which typically take around 2-3 days for realisation of the investment amount by the mutual fund. Further, investors who invest closer to the cut-off time may also miss out on allotment of units based on the same day’s NAV, in case of a potential delay in settlement of payments.
Written Policy for AMCs
AMCs will be required to frame a written policy, to be approved by the board of the AMCs and the trustees, regarding the role and responsibilities and activities of the various teams engaged in fund management, compliance, back-office, risk management, etc. in relation to various stages such as, order placement, order execution, trade allocation, etc. SEBI has stated that the policy should ensure that all the schemes of the mutual fund and its investors are treated in a fair and equitable manner. The onus on ensuring compliance with the policy will rest with the board of directors of the AMC and the trustee, and they shall ensure compliance with the following:
1. Automated Order Management System
AMCs are required to establish an automated order management system (OMS), wherein orders for equity and equity related instruments shall be placed by the respective fund managers of the schemes. Where a fund manager is in charge of multiple schemes, orders shall be placed scheme wise on the OMS.
All regulatory and allocation limits, as specified in the scheme information document, shall be inbuilt in the OMS, thereby ensuring that any order in breach of such limits is not accepted. AMCs will also be permitted to place additional soft limits for internal control and risk management. However, any change in the inbuilt limits will require approval of the compliance and risk officer of the AMC.
2. Order placement and Trade Allocation
AMCs shall ensure that dealing desk is suitably staffed and the dealing room should be equipped with dedicated recorded telephone lines, with restrictions on access to mobile phones, access to internet facilities, sharing of information, etc. inside the dealing room except for trade execution purposes. Further, with respect to order placement for multiple schemes, the circular allows dealers to place such orders either individually or on a pooled basis. For pooled orders, post allocation of trades shall be on a pro-rata basis, as per the size of the order. Further, the written policy shall also specify how much margin or collateral shall be segregated or placed amongst various schemes, without affecting the interest of the schemes.
In addition to the above, the circular also requires AMCs to maintain an audit trail of activities in relation to order placement, trade execution and trade allocation, along with time-stamping, and any non-compliance of the above norms shall be reported to trustees on a quarterly basis, and to SEBI by the trustees in their half-yearly report.
