Manipulation of NAV norms in debt schemes miffs Sebi

http://www.moneyspidery.com/2012/02/09/manipulation-of-nav-norms-in-debt-schemes-miffs-sebi/

The Securities and Exchange Board of India (Sebi) has expressed displeasure over some investors getting the same day’s net asset value (NAV) by splitting their purchases in income or debt schemes to ensure the Rs 1-crore limit is not crossed.

On purchase of units in income or debt-oriented schemes, other than liquid schemes, with an amount equal to or more than Rs 1 crore, irrespective of the time of receipt of application, the closing NAV of the day on which the funds are received by the mutual fund house is applicable. If the investment is under Rs 1 crore, investors get the NAV of the day on which the application was made.

Generally, income or debt schemes invest in fixed-income securities such as bonds, corporate debentures, government securities and money market instruments and aim to provide regular and steady income to investors. Sebi has found that certain entities were exploiting regulatory loopholes to get the same day’s NAV by splitting their investments.

REGULATOR NOT PLEASED

* To get same day’s NAV, some investors are splitting investments, putting in multiple applications of just below Rs 1 crore to circumvent norms

* Sebi asks fund houses to ensure proper controls are in place to prevent the misuse

The method is simple. Say, an investor wants to put Rs 3 crore in a debt scheme. If he puts the entire sum through a single application, he will get the NAV of the day on which the fund house receives the money. It takes two-three days for a fund house to receive the money through cheques. Instead, if the investor splits his investments in four applications of, say, Rs 95 lakh, Rs 90 lakh, Rs 85 lakh and Rs 30 lakh on the same day, he will get the NAV of that day itself.

This practice has not gone down well with the regulator. “Sebi has noticed instances of investments being split to ensure the threshold limit of Rs 1 crore is not crossed in income or debt schemes, so as to avail the trade-day benefits. In some cases, total investments made by a single investor in a day exceeded Rs 1 crore,” said a senior executive of a domestic fund house.
According to the head of fixed income at another fund house, the regulator has asked fund houses to ensure proper controls are in place to prevent the practice and protect the interest of existing investors. Business Standard has reviewed Sebi’s note to fund houses on this issue. An e-mail query to Sebi’s spokesperson remained unanswered.