In a meeting last week, the industry body said the surge in interest for funds with bonus options had attracted the attention of market regulator Sebi. Amfi was indirectly alluding to JM Financials arbitrage scheme, which had collected in excess of R5,000 crore in July higher than the total assets of around R4,500 crore of all arbritrage funds at the end of June. The scheme had reportedly attracted money, dangling the tax carrot provided by what is known in industry parlance as bonus stripping.
While the schemes with dividend or bonus options are perfectly legitimate MF products, what is inviting criticism is the practice of providing advance intimation of expected payouts to the potential investors/distributors, it said.
Urging its members to follow regulation in letter and spirit, Amfi further said that it would not like to advocate any kind of prior intimation to investors on such products which is in contravention of Amfi Code of Conduct and against the spirit of regulation.
Its only an advisory and a warning against unfair advanced intimation given to investors, a fund official said. He further said that technically Sebi had no locus standi on the issue till the time the bonus is declared. They can act only once the bonus is given out. He also ruled out any action any particular fund house.
Bonus stripping involves the practice of investors buying fund units three months before the record date, pocketing the bonus units and selling the original units bought before the bonus record date immediately at a lower NAV.
A capital loss is booked on sale of the original units. The bonus units are kept invested for another nine months and sold a year after the purchase of the original units. The bonus units sold, thus, become long term capital gains and no tax is paid on their sale.
Arbitrage funds have given average category returns of about 9.4% in the last one year, according to data collated from Value Research. The total assets of these funds stood at a little over R10,000 crore at the end of July.