It’s been nine months since Sebi allowed MF units to be traded on the stock exchanges, the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE), but the move hasn’t yet taken off. Less than 0.01% of the total inflows into MF schemes come through stock exchanges.
Some months back, Sebi allowed National Securities Depository Ltd (NSDL) and Central Depository Services (India) Ltd (CDSL) to convert existing physical MF units into dematerialized form so that they are transacted on the stock exchange.
Now, Sebi has allowed these units to be transferrable.
Some news reports say that Sebi also intends to make listing of all MF schemes on stock exchanges compulsory soon.
What this means?
If you hold shares in demat form, you can transfer them to whosoever you want, provided the receiver, too, has a demat account. You can either sell the shares on the stock exchange during market hours or can transfer to someone during off-market hours as part of an off-market transaction (a buy-sell transaction done outside of market hours).
Transfer of MF units has been a grey area until now. Though the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996, permit MFs to allow investors to transfer their existing MF units, fund houses have not allowed all unit holders to transfer their units, en masse. Since fresh units are continuously created, a transfer facility is not really merited. Only in select cases, for instance a unit holder’s death, have they allowed units to get transferred. In this case, the MF units get transferred to the second holder or the nominee. Or, say, you pledged your MF units to a bank for a loan and you default on the loan, the units get transferred to the bank.
Who pays the exit load?
First, off-market transfer need not happen at the market price, though experts say that in many cases it happens close to the market price.
Second, when unit holders redeem their units, the fund house deducts the load amount from the redemption value and returns the rest to the unit holders.
However, when you transfer MF units (off-market transfer), MFs do not have a way to find out whether or not you pay the exit load.
“At present, the fund house deducts exit loads, which are used to meet costs incurred by the fund house. Once investors start transferring their units directly to other investors, who will remind the buyer to deduct exit load from the purchase price,” says a chief executive officer of an AMC who did not want to be named.
Some fund houses have a different view. The head of operations of a Mumbai-based fund house said that perhaps the industry may take a view to exempt transfer of units from exit loads. “Exit loads are levied on the units redeemed. In case of off-market transfers, MF units are not getting redeemed. They are in perpetual existence. Hence, the MF industry may come to a consensus to waive off exit loads in such cases.”
While this may ease operational issues, it could create a disparity between different classes of investors—those who hold physical units and those who hold demat units. In an industry that is still reeling under the removal of entry loads, this may only add to the present worries. That apart, the rationale of exit loads—to deter premature withdrawals—might get lost.
Sebi’s latest move, though, seems to have caught the MF industry off-guard. Although some fund houses privately admit there’s a lot of work to be done, many fund houses are hopeful of finding a solution. “Clearly, not doing anything is not the answer,” said an MF official, who heads operations in a bank-sponsored MF. He expressed confidence that a reasonable solution will be found.
Hoshang N. Sinor, chief executive, Amfi says: “It is a good idea, but there are operational challenges in implementing this. We find that it will not be possible to implement this by 1 October. The matter doesn’t just involve MFs and their agents, but also depositories like NSDL and CDSL, and stock exchanges. All will get impacted and it bodes well for the system if all players concerned get elevated and benefit from this move.”
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