SUBSCRIPTION OF MUTUAL FUNDS’ IPO BY MF
Practice hampers fresh fund flow to marketAhmed Shawki
Country’s capital market is not getting expected amount of fresh fund through the flotation of new mutual funds as leading asset management firms are selling huge amount of units of their funds to other mutual funds to complete the sales of the initial public offering portion.
In many cases, the fund managers are completing the sales of the IPOs of their newly-launched funds by selling units to their other funds operating in the market.
But, they are charging sponsors management fees for all the schemes, claiming that those are fully subscribed whereas they have just shifted money from one fund to another.
Last year, seven mutual funds were launched and majority of those funds realised their public subscriptions with the help of other mutual funds.
According to the IPO results, last year four mutual funds offered to public units worth Tk 327.50 crore of which Tk 109.54 crore was subscribed by several schemes of other mutual funds or by own mutual funds of the same asset manager.
More than 35 per cent of money raised through these mutual funds was not fresh money as the funds of other mutual funds are already-existed-funds in the capital market, the data showed.
A mutual fund is a type of professionally-managed scheme that pools money from many investors and invest on behalf of them.
The public offer of LR Global Bangladesh MF One, launched last year, was Tk 150 crore of which Tk 49.44 crore was invested by four of LR Global’s own schemes and seven schemes of RACE Asset Management Company.
In 2011, the RACE Asset Management Company also floated two mutual funds — AB Bank 1st MF and EBL NRB Mutual Fund.
The public offering of AB Bank 1st MF was Tk 75 crore of which Tk 24.63 crore was invested by four schemes of LR Global Asset Management Company.
The EBL NRB MF offered units worth Tk 75 crore of which units worth Tk 8.5 crore were subscribed by other mutual funds.
AIMS of Bangladesh Limited floated Reliance Insurance MF last year, with a public offer of Tk 27.50 crore of which units worth Tk 26.97 crore was subscribed by six mutual funds including three of AIMS own funds.
Market experts said the practice gave a distorted picture of the inflow of fresh funds to the capital market.
They also questioned the efficiency and integrity of the fund managers, terming subscribing own schemes and charging fees for all unprofessional and unethical.
Moreover, if one mutual fund performs badly it would create a chain reaction to all other mutual funds as those have huge investment in other, they added.
‘The practice is surely giving a distorted picture of the inflow of fresh funds to the market,’ former Securities and Exchange Commission chairman Faruq Ahmed Siddiqi told New Age.
‘The SEC needs to give attention to the matter and reform the related laws if necessary,’ he suggested.
According to Schedule Five, Rule- 56(VII) of the Securities and Exchange Commission (Mutual Fund Rule) 2001, a fund manager can not invest or lend money of its one scheme to another.
The efficacy of the rule comes under question when one of LR’s funds, DBH First Mutual Fund, invested in the Green Delta Mutual Fund in 2010.
AIMS Bangladesh wrote a letter to the Securities and Exchange Commission on July 18, 2010 and sought advice about the LR’s practice of subscribing one scheme with the money of another.
In response to the letter, the SEC on July 27, 2010 gave an explanation of the rule saying that DBH First Mutual Fund was not a scheme of the Green Delta Mutual Fund and two
funds belonged to different sponsors.
But, the SEC clarification on the matter did not mention anything about the fund manager, which the rule was about, rather focusing on having different sponsors.
‘We sought SEC advice on the matter and the commission’s clarification approved such practice. So, we floated Reliance Insurance MF accordingly,’ AIMS managing director Yawer Sayeed told New Age.
He however said, ‘I have two of my funds lined up, which the SEC approved, but did not launch those just to avoid such practice.’
LR Global officials denied making any comment on the matter.
Asked about the matter, a senior SEC official told New Age that such practice should come under good governance by amending related laws.
He said if the mutual funds invested more into listed companies then the unit holders would get some dividend at the end of the year.
‘But, as the mutual funds are investing huge amount of funds in the other mutual funds, the retail unit holders might end up without getting any return,’ he said.
He also said the regional practice of the mutual funds also differed from the existing practice in Bangladesh.
In India, a fund manager cannot invest more than five per cent of the fund from one scheme to another. Fund managers are also not allowed to charge any management fees when it invests in own schemes, the official added.
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