SEBI Circular on Review of Dividend option(s)/Plan(s) in case of Mutual Funds

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Review of Mutual fund dividend options/plans


Dividend option/plans of Mutual fund schemes are in which profits are distributed timely to the unit holders .Net Asset Value (NAV) of the fund reduces by dividend amount paid to the investors. Thus , here dividends are not just distribution of profits, but capital can also be distributed along with it which results in capital erosion. This is sometimes misleading for the investors.

In the recent circular published by SEBI ,it has notified mutual fund dividend option/plans to rename their scheme names so that investors have a fair idea about the scheme. In this blog, let us take a look at the changes that Mutual fund schemes will have to undertake according to SEBI circular.

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SEBI Circular

  • SEBI has issued this circular to protect the interests of investors in securities and to promote the development of, and to regulate the securities market.
  • When the units are sold and NAV that is the sale price is higher than the face value of the unit it represents gain. The gains realized shall be credited to an Equalization Reserve Account which can be used to pay dividends.
  • A clear communication should be made to the investor that under this scheme certain portion of his capital (Equalization Reserve) can be used for distribution of dividends.
  • On the basis Mutual Funds Advisory Committee (MFAC) recommendations it is decided to stipulate the following:
  • All existing and proposed Schemes of Mutual Funds shall name or rename the Dividend Option(s) in the following manner:
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Option/Plan Name
Dividend Payout Payout of Income Distribution cum capital withdrawal option
Dividend Re-investment Reinvestment of Income Distribution cum capital withdrawal option
Dividend Transfer Plan Transfer of Income Distribution cum capital withdrawal plan
Changes in Option/Plan names
  1. Offer documents shall disclose that the amounts can be distributed out of the investor’s capital (Equalization Reserve), which is a part of sale price that represents realized gains. Further, AMCs shall ensure that this disclosure is made to the investors at the time of subscription of such plans/options.
  1. AMCs shall ensure that whenever the surplus is distributed, a clear segregation should me made between income distribution (appreciation on NAV) and capital distribution (Equalization Reserve) shall be suitably disclosed in the Consolidated Account Statement provided to investors as required under Regulation 36(4) of SEBI (Mutual Funds) Regulations, 1996 and SEBI Circular No. CIR/MRD/DP/31/2014 dated November 12, 2014.

Above changes shall be effective from April 01, 2021. These changes should not be treated as Fundamental Attribute Change as per Regulation 18 (15A) of SEBI (Mutual Funds) Regulations, 1996

How will the SEBI circular impact investors?

The new nomenclature will help investors to clearly understand that a part of their capital is also getting withdrawn and it is not only the gains out of the scheme that are received. Also the tax implications on these new schemes can change.

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