Regulator Wants Mutual Funds To Pay Dividends Only From Realised Gains, Not Premium Reserve

MANY mutual funds may find it difficult to dole out magnanimous dividends to unitholders as seen in the past, with capital market regulator Sebi tweaking an accounting norm that will result in fund houses having lesser amounts for such payouts.

On Monday, Sebi barred fund houses from tapping the unit premium reserve to distribute dividends. Instead, it dir This is how it worked: For instance, if the face value of an equity diversified fund is Rs 10 apiece and its net asset value (NAV) rises to Rs 100, then Rs 90 will be part of the unit premium account (similar to accumulated reserves of companies). So, if an investor bought units at Rs 100 apiece, the dividends paid by the mutual fund would be drawn from the unit premium account, a practice which amounted to paying unitholders their own money. As per the new rules, Sebi is asking mutual funds to pay dividends from profits booked in the event of a surge in the market. This means, if the NAV rises from Rs 100 to Rs 110, mutual funds can only use Rs 10 to distribute dividends, provided profits were booked.

"This step will certainly affect the quantum of dividend payouts by mutual funds, and more importantly, it will plug misselling," said Rajan Mehta, executive director, Benchmark Asset Management. The revised norm will hurt most mutual funds and distributors, as they have churned fees in the past by luring investors, mainly affluent, into equity schemes for dividends. Mutual funds, through distributors, unofficially inform these investors their intention to pay dividend way before the dividend declaration date. These investors exit the scheme on or after this date, pocketing the tax-free dividend and setting off losses from mutual fund investments with other gains. Retail investors are known to buy schemes for dividends, without knowing that such payouts result in a corresponding decline in the NAV of the scheme, as dividend distribution reduces the size of the fund. "Dividend payouts in India was like taking money from the left hand of an investor and putting it in the right...retail investors did not benefit from this," said a head of wealth management of a Mumbai-based broking firm.

Mutual funds feel the rules to pay dividends from realised gains are against the market regulator's vision to encourage them to be long-term investors. "Sebi is simply asking us to churn portfolios more, if we want to pay dividends. This new rule will turn fund managers into traders, as we are also under a lot of pressure to deliver dividends to retail investors, who are used to this practice for a long time now," said a top official with a private mutual fund. "For example, investors, who had put Rs 10,000 into Infosys in mid-1990s, would have earned at least over a crore by now. In the pursuit of booking profits, we will miss out on such opportunities," he added.

SEEKING FAIR PLAY

* Sebi has barred fund houses from tapping the unit premium reserve to distribute dividends

* Regulator's move will help check misselling

* Retail investors are known to buy schemes for dividends without knowing that such payouts result in a decline in the NAV

Source: http://epaper.timesofindia.com/