Thursday, May 5, 2011

Mutual Fund Scheme: Change in Fundamental Attributes

The Securities Appellate Tribunal (SAT) has ruled in a matter involving the HSBC Mutual Fund. In that case, HSBC had issued a scheme with two plans, viz. a long term plan and a short term plan. The relevant investors had invested in the short-term plan. However, HSBC wound up the long-term plan, and changed the term of the short-term plan by increasing the tenure. This resulted in a fall in the net asset value (NAV) of the scheme thereby jeopardizing the interest of the investors.

SAT decided in favour of the investors in this case, and its ruling on two counts is noteworthy:
1. Such a change in the term of the plan was found to be one that affects the fundamental attributes of the scheme and modifies the interests of the unitholders. It was given effect to without notifying the unitholders and providing an exit option as set out in Reg. 18(15A) of the SEBI (Mutual Funds) Regulations, 1996; and

2. The investors here were entitled to relief from the SAT on appeal although they had sold their units previously in order to cut their losses. Going by this, investors who no longer hold their investments are entitled to relief under securities so long as they traded at a loss at the time of the exit despite recovery of the securities to a higher value subsequently (including at the time of appeal).

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