Sebi Strengthens Mutual Fund Standards; liquidation of plans only after consent of majority unitholders

In a move to further protect the interests of mutual fund investors, Sebi has made it mandatory for mutual fund trustees to obtain unitholder consent when a majority of trustees decide to wind up a plan.

Under the new standards, mutual fund trustees will be required to obtain unitholder consent when a majority of trustees decide to wind up a plan or early redeem units of a closed-end plan.

The trustees will be required to obtain the consent of unitholders by a simple majority of unitholders present and voting on the basis of one vote per unit held and publish the results of the vote within 45 days of the publication of the notice of circumstances. leading to liquidation, Sebi said. in a notification released on Tuesday.

In case administrators do not get consent, Sebi said the system will be open for business from the second business day after the voting results are released.

Amending mutual fund standards, Sebi said trustees will give notice within one day, disclosing the circumstances leading to the winding up of the scheme to the regulator and in two daily newspapers circulated across India as well as a vernacular newspaper circulating where the mutual fund is incorporated.

The decision to change the regulations came after the Supreme Court ruled in July that trustees were required to obtain the consent of majority unitholders for the closure of mutual fund schemes after issuing a notice disclosing the reasons. of their decision to wind up the plans.

The Supreme Court’s decision came in the case involving the liquidation of the Franklin Templeton Mutual Fund’s six debt schemes.

The fund house closed its six debt mutual fund programs on April 23, 2020, citing redemption pressures and a lack of liquidity in the bond market.

The programs – Franklin India Low Duration Fund, Franklin India Dynamic Accrual Fund, Franklin India Credit Risk Fund, Franklin India Short Term Income Plan, Franklin India Ultra Short Bond Fund and Franklin India Income Opportunities Fund – together had approximately Rs 25,000 crore as assets under management.

In addition, the watchdog has required mutual funds to follow Indian Accounting Standards (Ind AS) from the 2023-24 financial year.

“Financial statements and accounts of mutual funds should be prepared in accordance with Indian Accounting Standards (IND AS),” Sebi said.

In addition to the Ind AS requirements, Sebi has amended the standards for accounting-related regulatory provisions to remove redundant provisions and provide more clarity.

For financial statement purposes, Sebi said mutual funds would mark all investments to market and carry investments on the balance sheet at market value.

“Gains or losses realized on the sale or redemption of investments, as well as unrealized appreciation or depreciation will be accounted for in all financial statements through the income accounts,” Sebi said.

However, since unrealized gain from investment appreciation cannot be distributed, provision should be made for excluding this item when determining distributable income, he added.

The aggregate market value of investments in securities will be shown separately for each type of investment, such as stocks, preferred stocks, publicly traded convertible debentures, non-convertible debentures or bonds further differentiating between publicly traded ones. scholarship and those placed privately.

The amendment comes after Sebi’s board approved a proposal to do so in December.

Dolores W. Simon