The Hindu Business Line : Cap on holdings, investors: Will Bajaj Auto vs UTI MF case pave way for relook at SEBI rule?

THE Bajaj Auto versus UTI Mutual Fund case, being fought in the Bombay High Court, has brought the differences between asset management companies and the Securities and Exchange Board of India over the 20-25 rule back into the limelight.

Asset management companies (AMCs), through the Association of Mutual Funds in India (AMFI), have been trying to persuade SEBI to dilute the 20-25 rule. AMCs say that unless the regulation is re-looked, investors would have to face the burden of forcibly having to redeem their investments.

The rule states that all mutual funds should have a minimum of twenty investors in each of the schemes and no investor should hold more than 25 per cent of the total units of the scheme.

The debate between SEBI and the AMFI is over whether the rule must be applicable at the scheme level or the plan level.

Most mutual funds have several plans, like bonus, dividend, growth, etc., under each scheme. AMFI's argument has been that if the portfolio of the various plans under a scheme are identical, then the 20-25 rule should be applied on the scheme overall and not for each individual plan. So far, SEBI has not shown its consent to modify this rule. Asset management companies are hopeful that the case would help bring the difficulties of plan-level compliance for this rule to the fore. Though SEBI had given fund houses one full year to comply with the regulation, a further extension was sought and the deadline was postponed to January 31 from December 31, 2004. Despite the extension, AMCs say that several funds are likely to face closure as plan-level compliance is proving to be very difficult.

"The case that is being contested had over 1,000 investors. It is clear that the fund was not specifically drafted to help a few institutional investors manage their treasury. Despite this, if the fund has to be closed, it reflects the draconian nature of the regulation," said the Chief Executive Officer of an AMC, on the condition of anonymity.

The regulation was primarily drafted in order to dissuade institutional investors from investing in "hand-crafted" mutual funds as a mechanism for avoiding tax.

Fund houses were constructing funds to the specifications of a handful of big investors. SEBI sought to clamp this practice with the 20-25 rule. AMCs say that it has been more difficult to comply with the minimum 20 investors rule than the latter. "It is a bit surprising that this fund had over 1,000 investors and yet one investor held such a large chunk," said the head of marketing of an AMC.

Fund houses have been communicating to their big investors since December asking them to withdraw part of their investments in funds where their share of the corpus exceeds 25 per cent.

AMCs say that the outcome of this case is being keenly watched as several funds are struggling to comply with the regulation and may be forced to terminate certain plans if they find it too difficult to get more investors.

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