MFs hold back dividend plans after SEBI diktat.

Some mutual funds have cancelled plans to distribute dividends to unitholders to comply with a recent circular by the Securities and Exchange Board of India (SEBI) that directed funds to change the way they source such payouts. The reversal of dividend payout plans follows clarification from the market regulator that the circular was effective from March 15 — the day it was announced.

As the circular did not mention the date from which the new rule would be applied, there was confusion about when would the new rule take effect. Some mutual funds, which assumed the circular would be effective April 1 — the new financial year —, went ahead with the dividend announcements. Some others, whichd planned dividends, did not make it public due to lack of clarity. But these announcements and proposals were reversed following a SEBI clarification to specific queries by mutual funds earlier and also to an industry representation on Monday on the matter.

UTI Mutual Fund has cancelled dividend payouts in three schemes. ICICI Prudential Mutual Fund, which proposed a dividend in one of its schemes, has shelved the plan. Sundaram BNP Paribas has also suspended plans to pay dividend in one of its schemes. Mutual fund distributors said some more fund houses may withdraw dividend announcements and plans.

The SEBI circular on March 15 directed the mutual fund industry to pay dividends only from realised gains and not from the unit premium reserve. An example of how it worked: if the face value of an equity diversified fund is Rs 10 apiece and its net asset value (NAV) rises to Rs 50, then Rs 40 goes to the unit premium account. So, if an investor bought units at Rs 50 apiece and a dividend was announced, it amounted to paying old unitholders from the proceeds received from the new unitholders.

“SEBI is concerned that payout of dividend through the unit reserve premium will lead to underfunding of reserves,” said a senior official of a mutual fund, on condition of anonymity. “The Companies Act stipulates that dividend be paid out of actual profits.”

So, now, mutual funds can pay dividends only from booked profits by that particular scheme. For instance, if the NAV rises from Rs 50 to Rs 60, mutual funds can only use Rs 10 to distribute dividends, only if profits were booked.

Industry officials said the step would reduce mutual funds’ capacity to pay liberal dividends and reduce the instances of ‘misselling’ by distributors. It is also expected to curb ‘dividend stripping’, wherein investors book a notional loss due to the reduction in the NAV of the scheme to the extent of the dividend paid out, and use it to offset capital gains tax elsewhere. Actually, the investor does not suffer any loss, because the dividend he receives is tax free. Often mutual funds encourage dividend stripping, to attract inflows into their schemes. In the past, distributors churned fees luring investors into equity schemes for dividends.

Source: economictimes.com
 
Thanks,
Nimesh.