Large investors get AMFI rap

Mumbai: If you thought manipulation and malpractices are the prerogative of equity markets, then you are wrong. Bonds, income funds and gilt funds too find these ideas quite exciting. If muscle power rules the underworld, money power does the same in the wonder world of investments.

Not anymore. The Association of Mutual Funds (AMFI) has sensed that there is indeed some foul play happening, and has taken initiatives to prevent any recurrence of such deeds in the future.

What is the whole story about? Struck by the sudden rise in bond prices on 22 October, some large investors (apparently two big financial institutions), sought to get units allotted at the NAVs to gain an unfair advantage. The investible amount was large (around Rs 40 crore) enough to entice some mutual funds to adjust and accommodate these big bosses.

How does it work? Suppose one applies for an allotment of units in gilt or in an income fund before the scheduled cut-off time on any working day. The allotment would be made at the end of that days net asset value - which means the allotment is made at the prospective net asset value. On the other hand, if an application were to be made for an allotment of units in a liquid fund before the cut-off time on any working day, the allotment would be made at the previous days net asset value - called the historical net asset value.

But as the news of malpractice by the two institutions broke out, other mutual funds referred the issue to AMFI. In its response, AMFI sought to settle the matter once and for all by issuing an advisory note to all its members. The note advises them to resist from following unethical practices and instead allot units based on the norms specified in their offer documents.

It further reads: It is essential that all members strictly follow the exit and entry norms as disclosed in the offer documents of the scheme and no deviations are made. Any such deviation from the offer document and the normal practices on such occasions would not only affect the image of the industry but will also be viewed seriously by the regulator.