Transaction tax stopping fund houses from merging schemes

| Updated on: Jul 11, 2012
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Cost escalates as MFs have to sell and buy underlying equities

The securities transaction tax (STT) is stopping mutual fund houses from merging schemes. “Merger of schemes is not happening primarily because of the STT.

“When a fund is redeemed, the STT has to be paid by the fund house, which is a prohibitive tax,” said Mr Dhirendra Kumar, CEO of Value Research, a Delhi-based mutual fund analysis firm.

According to a PwC report, between 2006 and 2012, the number of schemes in the industry grew from 779 to 4,473 (counting various options of a single scheme as separate schemes).

Several schemes with similar mandates were launched in the industry during the boom period for new fund offers.

In 2010, the Securities and Exchange Board of India came out with guidelines for merger of schemes. SEBI asked fund houses to merge schemes with similar mandates. They were also asked to change the names of funds, wherever required, to avoid confusion.

This led to 46 schemes being merged by 17 fund houses in calendar 2011, according to data from Value Research. This year, till June, only six funds have been merged.

For a scheme to be merged with another, the fund house has to first seek SEBI’s permission.

Once the approval is received, the fund has to give one month to investors in the schemes to be merged as an exit window.

Then the fund managers of these schemes align the portfolios, which completes the merger. However, when schemes are merged, units need to be redeemed before the portfolios can be aligned.

‘wrong impression’

For underlying equity assets to be transferred from one scheme to another, equity of one scheme has to be sold. This transaction leads to a levy of the securities transaction tax and this has to be borne by the fund house.

None of the fund houses contacted provided data on the tax payout but insisted that the entire cost of the merger was borne by them.

According to industry sources, one fund house had to shell out close to Rs 20 crore as STT last year for merging two schemes.

“Fund houses often merge poorly performing schemes with those with a good track record,” said a fund house official.

“That is what typically happens even though it is against the regulator’s wishes,” he said.

The SEBI Chairman, Mr U. K. Sinha, had said last month at a mutual fund summit that they encourage merging of schemes.

“But don’t get the impression that if a scheme is not performing the best way out is to merge it with another scheme.”


Published on November 17, 2017

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