Motilal Oswal
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Motilal Oswal

Sebi may overhaul mutual fund regulations, tighten pledged share norms in tomorrow’s board meeting

Updated : June 26, 2019 09:25 PM IST

The Securities & Exchange Board of India (Sebi) may consider overhauling certain regulations in the mutual fund industry in its board meeting scheduled for tomorrow, sources privy to the developments told CNBC-TV18.

Sebi may take in-principal approval from its board to change the method of calculation of Net Asset Value (NAV) for mutual fund players. It may also look at tightening regulations around the inter-scheme transfer of schemes managed by the mutual funds, according to multiple people familiar with the development.

Inter scheme transfer is a process of a mutual fund scheme selling securities to another scheme within the fund house. It is an alternative to otherwise selling the assets outside.

Sebi might also recommend some mechanism to reduce the concentration of Asset Under Management (AUM) with the top mutual fund players, said people familiar with the matter.

Emphasising the need of having more competition to ensure uniform growth among mutual fund industry players, Sebi chairman, Ajay Tyagi had said, “The top seven AMCs currently manage 70 percent of industry AUM. The top seven AMCs accounted for 60 percent of the entire industry’s revenue. The profit before tax as a percentage of revenue of large mutual funds has also stood at a very healthy rate of 40-50 percent.”

Another matter on Sebi’s agenda would be to widen the scope ‘encumbrance’ under the disclosure regulations with respect to pledged shares. The market regulator may include any restriction on ‘free & marketable’ promoter shares under the definition of encumbrance. The regulator may also include the provision of ‘non-disposal undertaking’ within the definition of encumbrance, sources in the know told CNBC-TV18.

Non-disposal undertaking means an agreement whereby a debtor taking a loan against shares and promises to not sell those shares. This arrangement helps the debtor to avoid categorising such shares as pledged shares.

Sebi may also look at coming out with guidelines around shares Differential Voting Rights (DVR). In India, as per regulations, DVR shares are a class of corporate shares which have Fractional Voting Rights. They are appropriate for companies whose owners do not want to dilute their control over their businesses by issuing ordinary equity shares.

By issuing DVR shares with fractional voting rights, they can raise capital without the risk of a hostile takeover. Sebi may give DVR shares superior voting rights (SR) along with fractional voting rights (FR).
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