Assignment 2.

Of
Financial Institutions and
Services

Topic:
Impact of Changes in SEBI guidelines on
the players of Mutual Fund Industry
(UTI Mutual Fund)

Submitted To: Submitted By:

Introduction to Mutual Fund
A mutual fund is a professionally managed type of collective investment scheme that pools
money from many investors and invests it in stocks, bonds, short-term money market
instruments, and/or other securities. The mutual fund will have a fund manager that trades the
pooled money on a regular basis. The net proceeds or losses are then typically distributed to the
investors annually. So, we can say that Mutual funds are investment companies that pool money
from investors at large and offer to sell and buy back its shares on a continuous basis and use the
capital thus raised to invest in securities of different companies.

History of Mutual Funds in India and role of SEBI in mutual funds

industry

Unit Trust of India was the first mutual fund set up in India in the year 1963. In early 1990s,
Government allowed public sector banks and institutions to set up mutual funds.

In the year 1992, Securities and exchange Board of India (SEBI) Act was passed. The objectives
of SEBI are – to protect the interest of investors in securities and to promote the development of
and to regulate the securities market.

As far as mutual funds are concerned, SEBI formulates policies and regulates the mutual funds to
protect the interest of the investors. SEBI notified regulations for the mutual funds in 1993.
Thereafter, mutual funds sponsored by private sector entities were allowed to enter the capital
market. The regulations were fully revised in 1996 and have been amended thereafter from time
to time. SEBI has also issued guidelines to the mutual funds from time to time to protect the
interests of investors.

All mutual funds whether promoted by public sector or private sector entities including those
promoted by foreign entities are governed by the same set of Regulations. There is no distinction
in regulatory requirements for these mutual funds and all are subject to monitoring and
inspections by SEBI. The risks associated with the schemes launched by the mutual funds
sponsored by these entities are of similar type.
Impact of SEBI on Mutual Fund Industry:

1. SEBI’s Latest Ruling- No entry load on any mutual fund investment

The recent ruling by the Securities and Exchange Board of India, SEBI, on the removal of entry
load on mutual fund investments has brought appreciation as well as criticism from different
corners. Last year SEBI had done away with entry load in cases where the investors directly
invested in mutual funds without going through an agent or a distributor.

With the new ruling in place, investors will be free to negotiate the commission with their
distributor and if they are smart negotiators they may even pay nil commission on their
investments. Because now that there will be no entry load on the money that you will invest in
any mutual fund scheme all the money that you invest will be used to buy mutual fund units
unlike earlier when 2.25 per cent would be lopped off and the rest invested. The benefits for
investors are:

• No entry load
• Distributors will get a fee for their advice and hence distributors will have to give the
right advice rather than promoting schemes, which offer them superior brokerage
• No more churning of the portfolio of the investors which many distributors used to
indulge in especially when a New Fund Offer (NFO) would be announced to earn hefty
commissions without any care for your money

Some distributors would make the investors exit their old funds and make them invest in new
fund where the commission would be high. It is not that NFOs are not good investments but this
practice which some of the distributors used to follow was wrong and unethical.

However, the flip side is now there also will be no cash back to the investor. Earlier, the practice
was that the distributor would pay back the investor a small amount out of the commission he
earned from mutual fund companies making the investor feel good about it.

The recent SEBI move brings in a greater degree of transparency in investments in mutual funds
and investors will be benefited as they would now get real advice in the true sense.

Impact on UTI Mutual Fund.

This would cause losses to the retail distributors, the fund houses to some extent, and the
relationship managers of banks who made a neat commission out of their advice to investors on
which funds to buy and sell. The business of Fund Houses like UTI would also be affected as
with passage of time the retail distributors may reduce or may entirely stop selling mutual funds
as it may no longer be lucrative to them. SEBI has also passed a ruling for the distributors to
disclose their commissions and other benefits. This ruling obviously did not go down well with
the industry. SEBI's ruling will be applicable to:
 • All investments in the mutual fund schemes -- including additional purchases or switch
from one scheme to the other -- with effect from August 1, 2009
• New schemes launched from or after August 1, 2009
• Systematic investment plan (SIP) registered on or after August 1, 2009

There are still lots of ifs and buts as SEBI is still to issue complete guidelines. But this
preliminary guideline too is a revolutionary step in itself as investors will now be paying for the
right kind of advice.

2. SEBI caps MF Exposure to Money Market & allows FIIs, funds to invest in
IDRs

In order to mitigate concentration risk, The Securities and Exchange Board of India (SEBI) has
decided to amend the Seventh Schedule of SEBI (Mutual Fund) Regulations to provide that no
mutual fund scheme shall invest more than 30% of its net assets in money market instruments of
an issuer.

The schemes may, however, continue to invest up to 15% or 20% of net assets, as the case may
be, in other investment grade debt instruments of an issuer as already provided in the
Regulations. These limits will not cover investments in government securities, T-Bills and
Collateralized Borrowing and Lending Obligations (CBLO).

IDR (Indian Depository Receipts)

SEBI Board has approved proposals to enable:

(a) mutual funds and FIIs to invest in IDRs subject to FEMA

(b) demat holding of IDRs

(c) issue of depository receipts by custodians on behalf of issuers.

This move can widen the investor base and increase liquidity for IDRs that will be issued in
India. Initially when IDRs were introduced, the government allowed only Indian citizens to
invest. Like American Depository Receipts (ADRs), where Indian companies raise money from
overseas market, IDRs would enable foreign firms to raise money from the Indian markets.

Impact on UTI Mutual Fund:

This would impact UTI as this amendment will increase liquidity for IDR’s. Investors will
consider safe and profitable investing in IDR’s then in UTI, causing losses to the company.
3.SEBI allows mutual funds to sell government securities
In its efforts to further develop the debt market, SEBI has decided on April 16, 2008 to allow
mutual funds to sell government securities contracted for purchase in DVP III mode for
government securities market in accordance with the guidelines issued by Reserve Bank of India
in this regard.

Under the DVP III mode of settlement, it is possible to sell government securities, already
contracted for purchase without taking delivery provided the transaction is guaranteed by an
approved central counterparty namely Clearing Corporation of India Ltd (CCIL).

Presently, mutual funds cannot sell such securities contracted for purchase as they are required
under SEBI Regulations to take the actual physical delivery of securities. This decision will put
mutual funds at par with other market participants like Banks, Primary Dealers and Insurance
Companies as they can now go in for the net settlement of government securities transactions.
SEBI Board also approved the participation of mutual funds in ‘when-issued’ (WI) market.

Impact on UTI Mutual Fund:

This ruling will have a positive impact on the profits of UTI. As they can easily sell government
securities , this will increase the liquidity and keep them at par with other competitors. It would
bring about a level-playing field among insurance companies, primary dealers, banks and mutual
funds. As of now, mutual funds were not allowed to sell government securities unless they had
physical delivery of the same.

4.SEBI allows launch of real estate mutual fund scheme

Market regulator Securities and Exchange Board of India (SEBI) has decided to allow mutual
funds (MF) to launch real estate mutual fund (REMF) schemes. It has amended the SEBI
(Mutual Funds) Regulations 1996 to permit the launch of REMFs.

The notification, citing eligibility criteria for those seeking to launch REMFs, stated that they
would have to be in the field of real estate business for a minimum of five years and have
adequate experienced directors.The SEBI added that the schemes will have to be close-ended
with its units listed on a recognised stock exchange wherein the net asset value (NAV) will be
declared daily.Such schemes will have to invest at least 35 percent the net assets directly in the
real estate business and the rest in in mortgage backed securities and securities of firms involved
in real estate business. The regulator added that the assets of the asset managers should be valued
every 90 days.
Impact on UTI Mutual Fund:

This amendment will be beneficial for the company as it grants them permission to invest in real
estate providing more investment opportunities. The notification, however, has granted a go-
ahead to MFs wanting to invest in any real estate asset owned by the sponsor or the asset
management company or any of its associates.

5. Mutual Funds can now invest $7 bn overseas

With a view to providing greater opportunity for investment overseas, the aggregate ceiling for
overseas investment by Mutual Funds registered with the Securities and Exchange Board of
India (SEBI) has been enhanced from USD 5 billion to USD 7 billion with effect from 3rd April
2008. The existing facility to allow a limited number of qualified Indian Mutual Funds to invest
cumulatively up to USD 1 billion in overseas Exchange Traded Funds, as may be permitted by
SEBI, shall continue. The investments would be subject to the terms and conditions and
operational guidelines as issued by SEBI.
The move is in line with the Reserve Bank of India's stated policy of encouraging flow of money
outside the country. However, even the existing limit is not being utilised by Asset management
companies. Industry estimates the amount invested overseas at less than $2 billion.
To enable the Mutual Funds to tap a larger investible stock overseas, Reserve bank of India has
announced on 8th June 2007, that they may also invest in

i) Overseas mutual funds that make nominal investments (say to the extent of 10% of net asset
value) in unlisted overseas securities;

ii) Overseas exchange traded funds that invest in securities; and

iii) ADRs/GDRs of foreign companies.

Impact on UTI Mutual Funds:

The impact of it would be that it will allow Indian mutual fund industry to widen their operation.
As per Sebi guidelines, MFs can now make investment in foreign debt securities, short- as well
as in long-term debt instruments with the highest foreign currency credit ratings. MFs can also
invest in overseas government securities of countries rated ‘AAA’. But this would have negative
impact on domestic players like UTI as people will go for investment overseas.

But the move will not have any major implications immediately, as Indian mutual funds have
invested only around $1.5 billion in overseas markets so far.
6. Sebi may allow MF units to be traded on exchanges
The Securities and Exchange Board of India (Sebi) is now planning to enable investors to buy
and sell mutual fund units through stock exchanges. Fund houses will also be allowed to sell new
fund offers (NFOs) through exchanges, helping them to save on distribution costs.Trading on
stock exchanges would be in addition to the proposed platform being developed by Association
of Mutual Fund of India (Amfi).The sources added that Sebi was keen on stock exchange-based
mutual fund purchases and sales or redemption because the Amfi platform could take a while to
be ready.

At present, investors have to approach fund houses to buy or redeem units. On their part, fund
houses declare net assets value (NAV) on a daily basis and trading takes place on the basis of the
previous day’s NAVs.Under the new mechanism, fund houses have to offer two-way quotes
based on the previous day’s NAV for trading.Apart from the sale and purchase of units, new
fund offerings could also be made through the stock exchange channel in addition to those
through distributors.

Impact on UTI Mutual Fund:

This will have positive impact on UTI as now they can sell their offers through exchanges ,
helping them to save their distribution costs. This will enhance their business activities and
profits. Investors will also find easy way to transact.

7. Introduction of Gold ETF in India

With the permission to allow Gold ETFs, Sebi has enabled mutual funds to purchase physical
gold and issue units to the buyers against the same. However, since the units will be issued in
demat form, investors will have the comfort of offloading any number of units on the NSE
without having to bear any exit load. Gold futures investors would need to watch ETFs closely.
In case of gold futures, the cost of carrying turns out to be high as compared to holding units of a
gold ETF in the demat account. However, despite such a possibility of gold ETFs taking over the
business from investors trading in gold futures through commodity exchanges, commodity
exchange members are not bothered.
Gold ETFs cater to people who want to invest and trade in gold without the risks traditionally
involved.

Impact on UTI Mutual Funds:

Gold exchange traded funds (ETFs) are fast emerging as a lucrative investment avenue apart
from mutual funds, stocks and bonds, though they still need to go a long way to catch investors’
fancy. . Gold ETFs cater to persons who want to invest and trade in gold in the demat form
thereby eliminating the cost and risks associated with physical gold investments. when trading in
gold ETF becomes more popular with investors and the daily volumes of units traded of gold
ETFs on NSE pick up, there are good chances that even the difference in gold future prices
between commodity exchanges and gold ETFs on NSE is likely to activate some degree of
arbitrage between the two. This, in turn, is likely to encourage higher volumes and turnover on
the commodity exchanges as well. Such an arbitrage, till date, is only possible between the
trading carried through MCX futures and NCDEX futures.This will enhance the business of UTI
also.

Bibliography

• http://investmoneyinindia.com/sebi-may-allow-mf-units-to-be-traded-on-
exchanges/

• http://www.sebi.gov.in/boardmeetings/liquidity.html

• http://www.banknetindia.com/banking/90414.htm

• http://www.thaindian.com/newsportal/business/sebi-allows-launch-of-real-
estate-mutual-fund-scheme_10042005.html

• http://www.business-standard.com/india/news/sebi-may-allow-mf-units-to-
be-tradedexchanges/371083/

• http://www.livemint.com/2008/04/29230206/Gold-ETFs-yet-to-shine-but-
an.html