Sebi clamps down on NAV nexus

Written by Sourav Majumdar | Mumbai, Aug 26 | Updated: Aug 27 2008, 06:13am hrs
Stock market regulator Sebi has taken a serious view of an irregular practice resorted to by a section of the mutual fund (MF) industry on liquid-plus schemes. In order to garner assets and please large investors, some fund houses are reported to offer net asset values (NAVs) for units even before investment cheques are credited to the schemes.

Sebi has now asked the Association of Mutual Funds in India (Amfi), the industry association representing MFs, to prepare a detailed paper on the subject and suggest ways to end this practice. Sebi is also mulling other steps, including making it explicit in the regulations that NAV be given to investors only after their cheques have been cleared.

FE had, in its edition of April 11, broken the story of the nexus between some large companies and MFs on liquid-plus schemes. Confirming the crackdown, Amfi chairman AP Kurian told FE: We are in the process of formulating recommendations to stop this practice. An internal committee is already working on the matter. The process will be changed.

Kurian admitted that as some large investors and high net-worth individualswho are being fiercely wooed given the growing competitionreceived NAVs even before their cheques were cleared, in effect, other investors were subsidising the irregular practice. Kurian said Amfis recommendations would be ready in about ten days.

Typically, around long weekends or a string of bank holidays, a company with large funds to invest strikes a deal with a fund house to issue its MF a cheque before the 3 pm cut-off, despite their account not actually having the money. Since the cheque has been received, the investor is issued the NAV for the same day, giving extra returns without the funds actually accruing to the scheme.

Those invested in liquid schemes even redeem them on the eve of such holidays and issue cheques equivalent to the redemption amount to the liquid-plus schemes. In the interim, the company gets the additional NAV before the cheque is cleared.

MF sources said companies often arm-twist funds to offer same-day NAVs because the law allows the latter to do so if the cheque has been deposited before the 3 pm deadline. Some large companies in northern and eastern India are notorious for such practices, the sources said. As a result, fund houses with stricter systems and management practices often lose out on large investments, the sources said.

The CEO of a fund house who did not wish to be identified said this problem could also be addressed if fund houses opened collection centres at banks so that the monies are credited quickly. Industry sources said once Sebi also specifies that NAVs cannot be issued unless the cheques are cleared, this practice will end.

Meanwhile, the first meeting of the Sebi-constituted MF advisory committee, under the chairmanship of former UTI chairman SA Dave, is scheduled to take place on Wednesday. In a rarity, Sebi will also meet MF trustees on August 29.

MF sources said companies often arm-twist funds to offer same-day NAVs because the law allows the latter to do so if the cheque has been deposited before the 3 pm deadline. Some large companies in northern and eastern India are notorious for such practices, the sources said. As a result, fund houses with stricter systems and management practices often lose out on large investments, the sources said.

The CEO of a fund house who did not wish to be identified said this problem could also be addressed if fund houses opened collection centres at banks so that the monies are credited quickly. Industry sources said once Sebi also specifies that NAVs cannot be issued unless the cheques are cleared, this practice will end.

Meanwhile, the first meeting of the Sebi-constituted MF advisory committee, under the chairmanship of former UTI chairman SA Dave, is scheduled to take place on Wednesday. In a rarity, Sebi will also meet MF trustees on August 29.

MF sources said companies often arm-twist funds to offer same-day NAVs because the law allows the latter to do so if the cheque has been deposited before the 3 pm deadline. Some large companies in northern and eastern India are notorious for such practices, the sources said. As a result, fund houses with stricter systems and management practices often lose out on large investments, the sources said.

The CEO of a fund house who did not wish to be identified said this problem could also be addressed if fund houses opened collection centres at banks so that the monies are credited quickly. Industry sources said once Sebi also specifies that NAVs cannot be issued unless the cheques are cleared, this practice will end.

Meanwhile, the first meeting of the Sebi-constituted MF advisory committee, under the chairmanship of former UTI chairman SA Dave, is scheduled to take place on Wednesday. In a rarity, Sebi will also meet MF trustees on August 29.

MF sources said companies often arm-twist funds to offer same-day NAVs because the law allows the latter to do so if the cheque has been deposited before the 3 pm deadline. Some large companies in northern and eastern India are notorious for such practices, the sources said. As a result, fund houses with stricter systems and management practices often lose out on large investments, the sources said.

The CEO of a fund house who did not wish to be identified said this problem could also be addressed if fund houses opened collection centres at banks so that the monies are credited quickly. Industry sources said once Sebi also specifies that NAVs cannot be issued unless the cheques are cleared, this practice will end.

Meanwhile, the first meeting of the Sebi-constituted MF advisory committee, under the chairmanship of former UTI chairman SA Dave, is scheduled to take place on Wednesday. In a rarity, Sebi will also meet MF trustees on August 29.