SEBI gets power to search and seizure any premises

SEBI Board approved norms to exercise new powers of search and seizure, investor refund, settlement proceedings and money-pooling

Market regulator Securities and Exchange Board of India (SEBI) on Tuesday said its Board has approved norms to exercise new powers of search and seizure, investor refund, settlement proceedings and money-pooling. SEBI Board also approved expanded list of entities permitted to file shelf prospectus that includes infra debt funds as well as some classes of non-banking financial companies (NBFCs) and housing finance companies. 


While doing away with the mandatory grading for IPOs, the market regulator said prospectus filed by companies would remain valid for multiple debt offers in one year. SEBI Board however, deferred a decision on regulations for the much-awaited real estate investment trusts (REITs). As part of its third attempt to revive REITs, the market regulator in October had floated draft guidelines for it.


Here are the decisions taken by SEBI Board...


1. Amendment to Securities and Exchange Board of India (Collective Investment Schemes) Regulations, 1999


The Securities Laws (Amendment) Ordinance, 2013 provides for regulation of pooling of funds under any scheme or arrangement, involving a corpus amount of one hundred crore rupees or more, to be deemed to be a Collective Investment Scheme, subject to sub-section (3) of section 11AA of the SEBI Act.


Accordingly, a proposal to amend the Securities and Exchange Board of India (Collective Investment Schemes) Regulations, 1999, providing a framework for regulation of such deemed Collective Investment Schemes and additional requirements for continuous compliance by a registered Collective Investment Scheme, was approved by the Board.


2. Amendments to SEBI (Investor Protection and Education Fund) Regulations, 2009


Consequent to the promulgation of Securities Laws (Amendment) (Second) Ordinance, 2013, the Board has approved amendment to SEBI (IPEF) Regulations, 2009 enabling utilization of such amounts primarily for restitution to investors and in case of failure of identification of investors, for the credit of amounts disgorged under the SEBI Act 1992, the Securities Contracts (Regulation) Act 1956 or the Depositories Act 1996 to the Investor Protection and Education Fund of SEBI.


3. Class of companies eligible to file shelf prospectus for public issuance of non-convertible debt securities


While Companies Act, 1956 had allowed only Banks and Public Financial institutions to file Shelf Prospectus, the Companies Act, 2013 enables SEBI to specify the class of the companies which can be allowed to file Shelf Prospectus. In this regard, the Board has decided to allow the following class of entities to file Shelf Prospectus for public issuance of non-convertible debt securities:

  1. Public financial institutions and Scheduled Banks;
  2. Issuers authorized by the notification of CBDT to make public issue tax free secured bonds;
  3. Infrastructure Debt Funds - Non-Banking Financial Companies;
  4. NBFCs, registered with RBI, Housing Finance Companies registered with National Housing Bank (NHB) and entities which have listed their shares/debentures in the stock exchanges for at least three years complying with the following criteria:
    • net worth of Rs500 crore,
    • track record of three years of distributable profits,
    • having a credit rating of not less than "AA-",
    • having no default history or regulatory action pending with RBI, SEBI or NHB;

To avoid fragmentation of the issues, which will affect the floating stock and thereby liquidity, it is further stipulated that only a maximum of four issuances can be made under a Shelf Prospectus.


Further, companies filing a shelf prospectus with the Registrar of Companies are not required to file prospectus afresh at every stage of offer of securities, within the period of validity of such shelf prospectus i.e. one year. They are required to file only an information memorandum, containing material updations, with respect to subsequent issues.


4. SEBI (Procedure for Search and Seizure) Regulations, 2013


The Securities Laws (Amendment) Second Ordinance, 2013, inter alia, confers direct powers on Chairman, SEBI to authorize the Investigating Authority or any other officer of SEBI to search any premises where incriminating documents are lying and seize such documents for the purpose of investigation.  The Ordinance also empowers SEBI to make regulations for executing the search operations and to ensure safe custody of any books of account or other documents that are seized.


In this respect, the Board approved the SEBI (Procedure for Search and Seizure) Regulations, 2013, made on the lines of the provisions in the Income Tax Act, 1961 and for providing the detailed procedures for such search and seizures by SEBI.


5. Making IPO Grading Mechanism Voluntary - Amendment to SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009


Considering the requests received from market participants, viz. investor associations and Association of Investment Bankers of India (AIBI), the recommendation of the advisory committee of SEBI, and to align with the principles laid down by Financial Stability Board (FSB) on reducing the reliance on Credit Rating Agencies, the Board approved the proposal to make the IPO grading mechanism "voluntary" as against the current provision of the same being "mandatory".


6. SEBI (Settlement of Administrative and Civil Proceedings) Regulations, 2013


The SEBI (Settlement of Administrative and Civil Proceedings) Regulations, 2013 were approved by the Board, subject to inclusion of the guidelines determining the settlement terms as part of regulations These regulations have been framed, keeping in view the provisions of the SEBI Act, as modified by the Securities Laws (Amendment) Second Ordinance, 2013, as also the public comments received on the Consultation Paper on the draft regulations that was placed on the SEBI website.


The salient features of the SEBI (Settlement of Administrative and Civil Proceedings) Regulations, 2013 are as under:


  1. The Regulations lay down the stand alone common substantive procedure for settlement of administrative and civil proceedings under all the securities laws;
  2. The Regulations formalize the already existing settlement process;
  3. They also provide for the guiding factors for dealing with the settlement process;
  4. Serious offences such as insider trading, etc. are excluded from the scope of settlement;
  5. In order to impart transparency in the process, the roles of the  of internal committee(s) and high powered advisory committee are specifically defined;
  6. The Regulations also provide for terms of settlement in monetary as well as non- monetary terms or combination of both.

7. FPI Regulations


As regards FPI Regulations, the communication from the Department of Economic Affairs to the CBDT and to SEBI, conveying the decision that all three categories of FPIs would be given similar tax treatment as available to FIIs presently, was noted.


Sensex, Nifty breaks the uptrend: Tuesday closing report

The NSE Nifty may move sideways ahead of the December F&O expiry

The BSE 30-share Sensex which opened in the positive for the fourth consecutive trading session on Tuesday was drawn into the red in the noon session after the occasional plunges in the negative in the morning session. The positive US economic data could not keep the indices in the positive and the indices closed in the red after two consecutive positive sessions. On Monday, we mentioned that Nifty has to stay above 6,280 and make higher highs, to keep the short-term rally going. Today the index closed below this level breaking the past two days of positive move.


The Sensex opened at 21,128 and after hitting a high of 21,157 went lower to hit a low of 21,011 and closed almost at the same level. The Sensex closed at 21,033 (down 68 points or 0.32%). The Nifty which opened at 6,296, hit a high of 6,302. The index hit a low 6,262 and closed at 6,268 (down 16 points or 0.26%). The NSE recorded a volume of 62.18 crore shares.


Among the other indices on the NSE, the top five gainers were Smallcap (0.86%); Midcap (0.53%); Midcap 50 (0.44%); PSU Bank (0.37%)  and Media (0.23%) while the Metal (0.96%); Finance (0.51%); Bank Nifty (0.42%); Service (0.35%) and Commodities (0.31%).


Of the 50 stocks on the Nifty, 19 ended in the green. The top five gainers were Ranbaxy (2.73%); Bhel (2.25%); Bajaj Auto (2.07%); Ambuja Cements (1.84%) and PNB (1.61%). The bottom five losers were Tata Power (3.20%); Sesa Sterlite (2.28%); Wipro (2.19%); Bank of Baroda (1.88%) and IndusInd Bank (1.82%).


Of the 1,241 companies on the NSE, 712 closed in the positive, 467 closed in the negative while 62 closed flat.


The Reserve Bank of India (RBI) could soon unveil a major change in monetary policy to explicitly manage consumer inflation, rather than wholesale prices, its main objective. The report, due by the end of the month, could also recommend making price stability the main objective of the central bank, while keeping but trimming the focus on its two other objectives: economic growth and financial stability.


US indices closed in the positive on Monday. US household purchases, which account for almost 70% of the economy, rose 0.5% after a 0.4% gain in October that was larger than previously estimated, the Commerce Department reported in Washington. A separate report showed consumer confidence increased in December. The Thomson Reuters/University of Michigan final index of consumer sentiment climbed to 82.5 from 75.1 a month earlier.


Except for Taiwan Weighted (down 0.07%) all the other Asian indices closed in the positive. The top gainer was Hang Seng which rose 1.13%.


China's central bank conducted the first reverse-repurchase agreements in three weeks, helping to ease the tightest financing conditions since a record cash crunch in June.


In Japan, the Cabinet Office released its December economic report today. The report dropped a reference to the word deflation for the first time since October 2009, saying "prices are holding firm."


Indonesia announced today that it will allow increased levels of foreign investment in the country's power plants, advertising, and pharmaceutical industries as part of government efforts to boost the slowing economy. Under the new policy, the government increased the maximum foreign investment in pharmaceutical companies to 85% from 75%, and in advertising agencies to 51% from 49%. Indonesia also allowed foreign investment of up to 100% from 95% for power plant projects carried out as a public-private partnership. Under the partnership terms, a foreign investor now can own an entire power-plant during a concession period, after which some equity transfers to the government.


European indices were trading in the green while US Future were trading marginally higher.


Why did HDFC Mutual Fund acquire Morgan Stanley?

HDFC Mutual Fund is one of the top asset managers in the mutual fund industry and yet, surprisingly, spent nearly 4%-5% of the total assets of Morgan Stanley to increase its own asset base by a meagre 3%

Morgan Stanley Mutual Fund is selling around Rs3,300 crore of assets to HDFC Mutual Fund which would mean just a 3% addition to HDFC Mutual Fund’s assets under management (AUM) of over Rs1 lakh crore. In the current acquisition, the mutual fund schemes of Morgan Stanley Mutual Fund that would merge with schemes of HDFC Mutual Fund are: Morgan Stanley A.C.E, Morgan Stanley Active Bond, Morgan Stanley Gilt, Morgan Stanley Growth, Morgan Stanley Liquid Fund, Morgan Stanley Multi Asset, Morgan Stanley Short Term Bond and Morgan Stanley Ultra Short Term Bond.

Why would a HDFC Mutual Fund, a fund house with the highest assets in the industry, acquire schemes of a smaller mutual fund house which makes adds an insignificant 3% to HDFC Mutual Fund’s assets under management? This would make business sense only if the cost of acquiring new investors would be more than the cost of acquiring the schemes of another fund house. Is it that even a top performing fund house is probably finding it difficult to acquire new investors?

Last year Fidelity Mutual Fund sold its assets to L&T Mutual Fund. Morgan Stanley Mutual Fund is the second fund house to sell off its mutual fund asset this year after Daiwa Mutual Fund sold its assets to SBI Mutual Fund for an undisclosed amount. With heavy outflow of assets over the recent years, many mutual fund houses have found their businesses unviable. The fact remains that investors are not interested in investing in mutual funds due to flawed products, flawed methods of selling, flawed regulation and huge costs to acquire new investors.

Only three mutual fund schemes of Morgan Stanley Mutual Fund have a corpus over Rs50 crore. Morgan Stanley Growth, an equity scheme, launched nearly two decades back, has a corpus of just Rs68 crore. The other two are Morgan Stanley Liquid Fund and Morgan Stanley Ultra Short-Term Fund. What is clear is that the Morgan Stanley Mutual Fund has been struggling to increase its corpus, having made a half-hearted push a few years ago to increase its range of funds.

According to an article published by Economic Times, HDFC Mutual Fund is said to have paid Rs150-170 crore which works out to 4.5% to 5% of the total assets of Morgan Stanley Mutual Fund. Considering fund houses were paying as much as 6% commissions to distributors for getting high ticket value investments for Rajiv Gandhi Equity Savings Schemes, HDFC Mutual Fund would have probably found this route of asset acquisition a cheaper alternative. (Read: High value applications perverting RGESS, while SEBI remains mum)

To get noticed by investors, mutual fund houses would need to pay high commissions to distributors to promote their mutual fund schemes and more so, after the ban on entry load in August 2009 that killed all incentives to sell mutual funds. Three years back we had reported that SEBI might have shot the mutual fund industry in the back by banning entry load without thinking through the implications. (Read: Mutual Fund turmoil: Can SEBI be held accountable?). With the banning of entry load, the distributors’ margins have been squeezed and they have been exiting the business of selling mutual fund in droves. Mutual fund houses had their hands tied, because if they had to increase commissions for distributors they would have to pay from their own pockets. In the past few years, there has been a huge outflow of equity assets, while the markets have remained volatile and flat. With depleting mutual fund corpuses, many mutual fund houses would have found the business unviable.

According to Birla Sun Life Mutual Fund, the fifty years old Indian mutual fund industry is fraught with a number of challenges. A press release stated that the penetration of mutual funds in India (as measured by the AUM/GDP ratio) remains low at 4.7% as compared to 77.0% in the US, 41.1% in Europe and 33.6% in the UK. Greatly under-penetrated, the industry comprising over 40 mutual fund companies today collectively manages 2.5% of Indian household savings. The right kind of awareness among investors about mutual funds, the diversity and benefits of its offerings remains a challenge. Being an advisory product which is largely distribution driven, stagnation in growth of distributor base also acts as a limiting factor.

Over the past year the SEBI came out with a slew of reforms in order to drive more retail participation. However, these new policies have had a marginal impact on mutual fund inflows. For years SEBI failed to pay heed to the voices of investors. Under the last two chairmen it did not pay heed to market players either. It has taken a trip on its own, at the cost of hapless retail investors and the mutual fund industry.



Deepak Gupta

3 years ago

4.5℅ of AUM will be recovered in just two years. So, it makes sense for HDFC AMC to buy this portfolio.

Sam Koshy

3 years ago

It is very clear that AMCs don't want long term sustainable equity funds, instead they are interested in immediate profits only.They don't entertain a higher trail payouts for IFA distributors who bring in long term sustainable retail equity investments. Immediate profits comes from short term investing in equity schemes, which is happening in the case of corporate distributors and banks and they churn the investors money frequently which results in ultimate loss for the entire investors in a scheme. Because the corporate distributors and banks bringing in high volumes AMCs are ready to pay them more than triple the normal brokerage they pay for the IFA. Clearly speaking big distribution houses& banks are paid high at the cost of small IFAs. Those AMCs which are sure that they will not get more assets from the distribution fraternity will try such tricks of acquisition and mergers for their survival. But they will surely feel the heat soon. Whoever wants to develop the markets should consult the key IFAs& distributors, who are dealing with the end clients (investors),for getting constructive suggestions to develop the retail market.-Sam Koshy


3 years ago

RGESS and closed ended funds are rarely sold by small distributors / IFAs and makes little difference to IFAs however big the commissions in those products may be. Moreover high commissions in these particular products are short term measures and have little impact in increasing the confidence of distributors to come in to the industry.

When IFAs like me bring in business fund houses hardly pay us 1% commission in the first year and from the second year onwards most fund houses pay around 0.5% commission for a majority of IFAs even today.

Focus has always been on bringing assets in to the industry with little importance given to sustaining them, hence the redemptions that we see today. Had the focus been on sustainability of assets, a higher trail only model would have been an auto choice. But, to give a higher trail only model fund houses have to sacrifice short term profits and sadly not many fund houses are willing to do so.

Had the increased expense ratio been passed on to the distributors in the form of a Trail commission of around 1% (irrespective of their size) it would have brought the sustainability of assets in to focus. If the existing active IFA survive and become profitable it will automatically attract new distributors to the industry.

Bringing back entry load would not only be an additional burden to the investors, it would bring back all the bad practices like churning, pass backs etc.,(which the industry is trying get rid of) and will dent the long term prospects of Mutual Funds as an industry.


3 years ago

1) If selecting right stocks to invest is not easy then selecting right MF is also not easy. there are more schemes of MG than good stocks to invest.

2)high With expenses and commotion paid investor will always get lesser than stocks in bullish market and loss more in bearish market.
3) Investor unfriendly rout for direct plans - Submission of documents physically for KYC to every fund house - and tracking them separably discourages us for even short term parking of funds with MF


3 years ago

There is too much of blame game here. The attempt of SEBI to stop certain bad practices like frequent new fund offers from 2004 to 2008 resulting in not much benefit to investors as much as distributors and mutual funds and subsequent doing away with entry load altogether by SEBI. On the other hand, the costs at AMC skyrocketing on account of very high employment costs (eg Fidelity employment costs was appr. 60-70 cr) and at an average the employment costs at most AMC is appr. 18-20 crores which is ridiculous given that most of the work in outsourced. COmpounded is the poor fund management and stock markets. So its not one piece of problem as articulated by the author, but plentiful. I see the industry only focusing on the AUM and valuation, thats a reality.

The latest one going when I take note of SEBI site is the number of closed ended funds being launched. eg of SUndaram, the commission I understand is app. 8% upfront. If this is the only way investors will be lured then there is a lifespan for such practice.

I only hope that PFRDA eases costs as well as brings in flexibility, thats a far better choice from a financial planning perspective.


3 years ago

Its finally an AUM gathering exercise, expenses of upto 2.75% year on year is probably what counts.
The big only became bigger!

Vaibhav Dhoka

3 years ago

Here financial literacy and availability of financial products is urban based and urban oriented only.

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