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Entry load off mutual schemes

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  • Published 18.06.09

Mumbai, June 18: Investors will no longer have to pay an upfront fee — termed as an entry load — when putting their money in a mutual fund scheme.

The board of market regulator Sebi today announced a set of major decisions that were designed to protect the interests of small investors at a time when they might wish to start nibbling at the opportunities thrown up by a boom in the markets. The bellwether sensex has leapt 66 per cent since March 1, making equity investment an attractive proposition once again.

At present, small investors have to pay an entry load of 2.25 to 3 per cent when they put their money in a mutual fund. Most of this goes to the distributor in the form of commission. A part of it also goes to the fund house to cover its marketing costs.

Sebi today scrapped the entry load on mutual funds and said investors could pay the upfront commission directly to the distributor. Observers say that in such a situation, the distributor may not charge a fee at all — or might be ready to accept a piffling amount — in order to attract business.

The market regulator also decided that distributors should disclose the commission they receive from the fund houses for different schemes.

“The investor will decide the commission that he is ready to pay the distributor. It will not be deducted by the fund and then paid to the distributor. If the investor makes an application for Rs 100, then the entire amount will be invested in the units of the mutual fund scheme,” Sebi chairman C.B. Bhave told reporters after the board meeting.

“It is a very good move and will lower the costs that an investor had to bear earlier,” Dhirendra Kumar, CEO of Value Research Online, told The Telegraph.

As of March 31 last year, there were 42 million mutual fund investor accounts. The number of investors will be much less because of multiple folios.

Sebi’s ruling will make life difficult for the distributors. Dhirendra Kumar reckoned that distributors and advisers would now have to re-invent their business. Similarly, fund houses would have to absorb some costs that they were passing on to the investor.

The regulator also rationalised the fees that it collected from market intermediaries like brokers, mutual funds and foreign institutional investors. Brokerages were charging Rs 20 per Rs 1 crore of turnover for sale and purchase transactions in securities other than debt securities. This has now been reduced to Rs 10 per Rs 1 crore of turnover. This relaxation may now be passed on to the investors.

In another significant move, Sebi barred listed companies from issuing shares with superior voting rights — a ploy that some promoters have tried to use to fob off takeovers and cement control.

The regulator had permitted to float shares with differential voting rights back in 2001 but very few have used that option. Liquor maker Jagatjit Industries floated such shares in 2004 and is the only one to have done so.

Promoter Karamjit Jaiswal had floated these shares to ring-fence the company against his estranged brothers, sparking a legal battle before the Company Law Board(CLB). Back in March, the CLB ruled in favour of Karamjit Jasiwal. It is not known whether today’s order will affect Jagatjit’s issue of these shares.

Tata Motors floated shares with lower voting rights last year through a rights issue but found virtually no takers. Gujarat NRE Coke had also flirted with the idea of superior voting rights shares last year but later abandoned the plan.

Sebi also introduced the concept of an anchor investor, a move that is expected to help issuers market their issues.

An issuer planning to come out with a book-built issue — where a price band is fixed for the shares and the eventual issue price is determined by demand — may allocate up to 30 per cent of the qualified institutional buyer (QIB) portion of the issue to anchor investors who must be QIBs.

The minimum size of the application by an anchor investor will be Rs 10 crore. They will be required to bring in a margin of 25 per cent on application and the remaining 75 per cent within two days of the date of closure of the public issue. There will be a lock-in of 30 days from the date of allotment.

Sebi, however, added that no person related to the promoter/promoter group can apply as an anchor investor.