The hunger for assets under management (AUMs) by mutual funds and the lure of greater returns for companies has led to some of them arriving at a cosy understanding.
Taking advantage of long weekends or a string of midweek holidays, companies are now seeking extra returns by arm-twisting MFs into calculating their net asset values (NAVs) even before their cheques have been credited. This arrangement between a few fund houses and companies has irked other funds, who say they are losing business to the unethical practice.
The mechanism is simple. On the eve of a long weekend (like the one coming up) or midweek holidays, a large company with, say, Rs 50-100 crore at its disposal, will park the funds typically in liquid-plus schemes and insist that it receives the same day?s NAV. Its cheque, however, can only be cleared and credited to the funds? accounts on the next working day, accruing to the company NAVs during the bank holidays.
?This is typically true of liquid-plus schemes. If we refuse, some companies blatantly tell us they will not park their funds with us, since other larger funds oblige them. Ultimately, it is existing unit holders who subsidise the practice, since the funds haven?t yet come into the scheme. It?s high time the regulator looked into this,? a senior official of one of the newer foreign asset management companies told FE.
These companies and funds clearly take advantage of an ambiguity in existing regulations, which do not explicitly state that units can be allotted only after a cheque is cleared and the funds credited. When contacted, a senior Sebi official said: ?If specific cases are brought to our notice, we can always conduct inspections and take stern action.?
Some companies invested in liquid funds even redeem them on the eve of bank holidays and issue cheques equal to the redemption amount on the same day for liquid-plus funds, knowing that by the time its cheques are cleared, the redemption amount would have been credited into its account–while making additional NAVs in the interim.
The CEO of a leading fund conceded that some fund houses and companies were indeed resorting to such practices. However, he said there were ways around it, using the real-time gross settlement mechanism whereby the fund house could insist on getting its money first. ?We also have collection accounts at various banks which help us avail the funds and don?t give companies such undue benefits,? he said.
Earlier, AUMs were calculated on a single date at the end of each month. But with some funds protesting this practice, average AUM is also calculated and made public every month. ?As a result, the rush for assets has now become an all-month affair, rather than restricted to the end of every month,? said the marketing head of a fund house.
