MUTUAL FUNDS - Soon, transfer demat MF units freely


by Y K AYEZAD E . A DAJANIA



On 6 September, the Association of Mutual Funds of India (Amfi), Funds of India (Amfi), the mutual fund (MF) industry body, wrote to the capital mar- ket regulator, the Securities and Exchange Board of India (Sebi), requesting the regula- tor to postpone the date of im- plementation for a recent Sebi ruling that mandates all asset management companies (AMCs) to allow investors to freely transfer their de- materialized MF units.

In a circular that Sebi issued a couple of weeks back, it had made it man- datory for all AMCs to im- plement the rule by 1 Oc- tober. As per the new rul- ing, you will be able to transfer your MF units, held in demat form, to your spouse, parents, children or even near and dear ones directly from one demat account to another.

Boosting MFs' stock exchange platform It's been nine months since Sebi al- lowed 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.

Apart from getting stock brokers to sell MFs--in the ab- sence of entry loads against equity shares that fetch them upfront bro- kerage--experts cite lack of aware- ness and the risks that brokers carry as the key reasons why the stock exchange plat- forms haven't yet taken off.



Time and again, Sebi has been taking steps to popularize the stock exchange platform.

Some months back, Sebi allowed Na- tional Securities Depository Ltd (NSDL) and Cen- tral Depository Services (India) Ltd (CDSL) to convert existing physical MF units into dematerial- ized form so that they are transact- ed 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 ex- changes compulsory soon. soon.



Sebi is expected to bring trad- ing on MF units on a par with share trading. At present, MF units directly reach the investor's account; the second phase will see units reaching the broker's pool account first. Only when the client's cheque gets cleared will the broker release the units from his pool account. As of now, since the units reach the client's account directly, (but the broker initially pays out of his own pocket since the MF has to re- ceive money on the day after punching the buy order), the broker stands to lose money if the client's cheque (that takes about a couple of days to clear) bounces.



“Once the second phase kicks in, brokers will get units in their pool account. They will, therefore, transfer it to the unit holder's account only af- ter the money is realized. This should be a major boost to the MF trading platform on the stock exchanges,“ says Rakesh Goyal, senior vice-president, Bonanza Portfolio Ltd, a Mum- bai-based financial services company. Cyrus Khambata, se- nior vice-president, CDSL, said that the second phase will start in about two months.

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. At present, you can either sell the shares on the stock exchange during market hours or can trans- fer to someone during off- market hours as part of an off-market transaction (a buy-sell transaction not routed through the stock exchange).



Transfer of MF units has been a grey area until now. Though the Securities and Exchange Board of In- dia (Mutual Funds) Reg- ulations, 1996, permit MFs to allow investors to trans- fer their existing MF units, fund houses have not allowed all unit holders to transfer their units, en masse.

Since fresh units are contin- uously created, a transfer facility is not really merit- ed. Only in select cases, for instance a unit holder's death, have they allowed nits 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 trans- ferred to the bank.



How to transfer MF units When you buy and sell MFs, you essen- tially transact with the fund house. If you wish to give your MF units to somebody else, the easiest--and the only--way to do it is to re- deem your units and gift the money.



After 1 October, you won't have to redeem your MF units and will al instead be able to enter into an off-market transaction directly with the person you wish to transfer your units to. On the other hand, when you sell your shares or MF units on the stock ex- change, you don't know who buys them.

An off-market transfer gets done through a spe- cial procedure. However, these are early days and it's unclear as to how transfer of MF units will take place in an off-market transaction.

For instance, most bro- kerages mandate cus- tomers to fill up a power of attorney (PoA) at the time of opening an account. A PoA restricts transfer of shares through off-market transac- tions; you can only transfer shares to a demat account in which the sequence of account holders is exactly the same as the account from which you T are transferring your shares. In other words, you can only transfer to your own account, elsewhere.



Market experts say that to ef- fect an off-market transfer, you will need to revoke the PoA, fill up the delivery instruction slip and submit it to your deposito- ry participant. There's a cost attached--about 0.04% or about `15-25.

Who pays the exit load?



Among a few key issues is how would the MF industry charge exit loads. Many equity funds levy an exit load for pre- mature withdrawal. Debt funds, too, levy exit loads to discour- age premature withdrawals.



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 de- ducts the load amount from the redemption value and re- turns the rest to the unit hold- ers. However, when you trans- fer MF units (off-market trans- fer), 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 di- rectly to other investors, who will remind the buyer to de- duct exit load from the pur- chase price,“ says a chief exec- utive officer of an AMC who did not want to be named.



Some fund houses have a different view. The head of op- erations 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 lev- ied on the units redeemed. In case of off-market transfers, MF units are not getting redeemed. They are in perpetual existence. Hence, the MF in- dustry may come to a consen- sus to waive off exit loads in such cases.“



While this may ease opera- tional issues, it could create a disparity between different classes of investors--those who hold physical units and those who hold demat units.

That apart, the rationale of exit loads--to deter premature withdrawals--might get lost.

Further, in an industry that is still reeling under the removal of entry loads, this may only add to the present worries.

Can costs rise?



When off-market transfers start, MFs would need to track them as and when they hap- pen; practically, every day.

This is mainly to distribute dividends, if any, to the correct unit holder. This could be a problem if too many investors change hands and the fund house declares dividends in the interim.



At present, for units that get traded on the stock exchange MF platforms, the two main de- positories, NSDL and CDSL, send regular information to all MFs' registrars and transfer agents (such as Computer Age Management Systems and Karvy Computershare Pvt. Ltd). Called benpos, or beneficiary position, this gives information about the unit balance as on that day and the name of the unit holders who hold these units. While CDSL gives benpos on a daily basis--only to MFs--NSDL gives it once a week. Anything extra comes at a cost.



“If MFs were to take benpos daily, it could incur huge costs to the MFs. As the total ex- penses that we charge to inves- tors on an annual basis are capped, the AMC will have to bear the cost,“ said a chief of another fund house, who also did not want to be identified as the matter involves the regula- tor. Added work at the regis- trar's end may also lead to an increase in their charges, which would further burden the fund houses, he added.

Who'll deduct tax at source?



When non-resident Indians sell MF schemes, they pay tax deducted at source (TDS). For equity funds sold before a year, you pay 15% short-term gains tax. On other MFs, you pay 30% TDS if you sell before a year. You pay 20% TDS if you sell after a year. Since this is TDS, the MF deducts it and re- deems the balance to a non- resident Indian (NRI) who submits a redemption request.



Once units get freely trans- ferable, it's unclear as to how the MF will recover this TDS from the NRI. As of now, there seems to be no mechanism that ensures this.



Sebi's latest move 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 ex- pressed confidence that a rea- sonable solution will be found.

Hoshang N. Sinor, chief execu- tive, 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 con- cerned get elevated and bene- fit from this move.“

source:livemint.com