Sebi strengthens mutual fund norms; winding up of schemes only after majority unitholders’ consent

Sebi strengthens mutual fund norms; winding up of schemes only after majority unitholders’ consent

In a move aimed to further safeguard the interest of mutual fund investors, Sebi has made it mandatory for trustees of mutual funds to obtain the consent of unitholders when majority of trustees decide to wind up a scheme.

Under the new norms, mutual fund trustees will be required to obtain the consent of the unitholders when the majority of the trustees decide to wind up a scheme or prematurely redeem the units of a close-ended scheme.

The trustees will have to obtain consent of unitholders by simple majority of the unitholders present and voting on the basis of one vote per unit held and publish the results of voting within 45 days of the publication of notice of circumstances leading to winding up, Sebi said in a notification issued on Tuesday.

In case the trustees fail to obtain the consent, Sebi said the scheme would be open for business activities from the second business day after publication of results of voting.

Amending mutual fund norms, Sebi said the trustees will give notice within one day, disclosing the circumstances leading to the winding up of the scheme to the regulator and in two daily newspapers having circulation all over India as well as a vernacular newspaper circulating at the place where the mutual fund is formed.

The decision to amend the regulations came after the Supreme Court in July held that the trustees are required to seek consent of majority unit-holders for closing mutual fund schemes after publishing notice disclosing reasons for their decision to wind up schemes.

The Supreme Court’s decision came in the case pertaining to winding-up of Franklin Templeton Mutual Fund’s six debt schemes.

The fund house shut its six debt mutual fund schemes on April 23, 2020, citing redemption pressures and lack of liquidity in the bond market.

The schemes – Franklin India Low Duration Fund, Franklin India Dynamic Accrual Fund, Franklin India Credit Risk Fund, Franklin India Short Term Income Plan, Franklin India Ultra Short Bond Fund, and Franklin India Income Opportunities Fund – together had an estimated more than Rs 25,000 crore as assets under management.

In addition, the watchdog asked mutual funds to follow Indian Accounting Standards (Ind AS) from 2023-24 financial year onwards.

“Financial statements and accounts of the mutual fund schemes shall be prepared in accordance with Indian Accounting Standards (IND AS),” Sebi said.

Apart from the Ind AS requirements, Sebi has tweaked the norms with respect to accounting-related regulatory provisions to remove redundant provisions and to bring more clarity.

For the purposes of the financial statements, Sebi said mutual funds will mark all investments to market and carry investments in the balance sheet at market value.

“The realised gains or losses on sale or redemption of investment, as well as unrealised appreciation or depreciation shall be recognised in all financial statements through Revenue Accounts,” Sebi said.

However, since the unrealised gain arising out of appreciation on investments cannot be distributed, provision has to be made for exclusion of this item when arriving at distributable income, it added.

The aggregate market value of investments in securities will be stated separately in respect of each type of investment, such as equity shares, preference shares, convertible debentures listed on stock exchange, non-convertible debentures or bonds further differentiating between those listed on stock exchange and those privately placed.

The amendment comes after the board of Sebi approved a proposal in this regard in December.

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