The Telegraph
Since 1st March, 1999
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Derivatives dollops on MF menu

Mumbai, Sept. 14: Mutual funds were today allowed to trade in derivatives, a relaxation that puts them on an even keel with foreign institutional investors (FIIs) who have long played this section of the market with elan.

A release from Sebi, which made the legal changes required for the policy shift, said mutual funds registered with the market regulator will be treated on a par with registered FIIs in respect of position limits in index futures, index options, stock options and stock futures contracts.

The mutual funds will be considered as trading members like registered FIIs and their schemes will be deemed clients, like the myriad sub-accounts that FIIs enlist.

The derivatives market, three times the size of the cash segment on the National Stock Exchange, has only two active players: FIIs and retail investors. Mutual funds, managing what is widely recognised as the small investors’ savings, have been restricted from playing actively.

The decision cheered mutual funds, which believe it will go a long way in ensuring better returns for investors. “It can even make us offer investors a hedge fund,” a manager affiliated to a leading mutual fund said.

Derivatives are contracts to buy or sell something in future at a price agreed now. In stock markets, it makes trading more predictable. However, the stakes can be as high as the risks, if fund managers fail to use them prudently.

When derivatives were introduced in 2002, Sebi allowed mutual funds to participate in derivatives only for the purpose of hedging and rebalancing their portfolio.

The curbs were suggested by the L. C. Gupta committee, which helped frame derivatives trading rules.

“There have been several changes in the structure of the cash market. Volumes in the derivatives market have also increased manifold,” the release from Sebi stated.

The market super-cop had a change of mind after its secondary market advisory committee favoured mutual fund participation in derivatives like that of FIIs.

The revised policy shall apply only to new schemes or to those whose offer documents have been filed with Sebi for approval.

The extent and manner of investment in derivatives will have to be explained, along with risks, in the offer documents. These should be peppered with numerical examples. Existing schemes can also join the pack, provided unit-holders have been informed of the pros and cons.

A consent has to be obtained from a “majority of the unit-holders”, Sebi said, adding an exit option should be provided to the dissenting investors. The option must be open for a month prior to investing in derivatives. No exit load can be charged from those who agree.

Board sessions

Sebi has said the boards of companies should meet at least once in four months, instead of three earlier. Chairman M. Damodaran felt good corporate governance is necessary, but not a sufficient factor, for strong performance.

“I believe that it is a necessary condition, and not a sufficient one. If a company has good corporate governance, it will have good performance on a sustained basis,” he told a corporate governance summit here today.

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