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Sebi’s new rules make MFs see red

Sebi’s new rules make MFs see red
Front-running is the act of buying or selling a stock ahead of anticipated action by a fund manager. Impact cost is the cost incurred to execute a large buy or sell order.“We will be needed to rebalance our portfolios every six months to add or delete stocks to meet Sebi’s criteria. Daily market cap and portfolio holding data is in the public domain.
Savvy traders might do front-running as they will be able to calculate which stocks are going to be added or removed. It will also result in a churn of portfolios and increase the impact cost, as most mid-cap schemes may exit a particular scrip at the same time,” said a chief investment officer with a leading fund house.

According to the framework laid down by Sebi, MF industry body Association of Mutual Funds in India, or Amfi, will have to provide a ranking of stocks at the end of June and December, based on their average market cap on both the BSE and the National Stock Exchange. Fund managers will have to rebalance their portfolios within 30 days, according to the updated list.

For instance, public sector lender Punjab National Bank currently is a ‘large-cap’ stock, as it is ranked 97 in terms of market cap. However, if the stock slips below rank 100, fund managers will have to exit the stock from their large-cap scheme portfolio.Meanwhile, Sebi has provided 100 and 150 stocks for large- and mid-cap-focused schemes, respectively, to choose from. According to Value Research, currently the universe of stocks for large- and mid-cap schemes is 104 and 250, respectively. The current mid-cap universe has stocks with a market cap between Rs 5,200 crore and Rs 26,000 crore. About 150 of these companies will no longer be eligible for mid-cap schemes and fall in the small-cap category.

“Currently, we go by market cap where mid-cap schemes invest in stocks that have a market cap of more than Rs 5,000 crore. Sebi, for the first time, has officially defined large-cap, mid-cap, and small-cap. Instead of a ranking methodology, it should have gone for a freefloat market cap-based cut-off. It would have simplified the process,” said the head of another fund house, adding the industry might soon discuss this issue with Sebi.

Free-float market cap excludes the shares held by promoters or those under lock-in. As this method takes into consideration only the stock that is freely available for trading, it acts as a good filter for liquidity. The fund manager gave the example of Avenue Supermarts, which has a full market cap of Rs 76,000 crore, but a free-float market cap of only  Rs 5,300 crore. At the end of September, the assets under management of equity MFs stood at Rs 6.6 lakh crore, and the number of open-ended schemes offered by fund houses was 359.

The move so far in medical devices Out of the 20-odd devices which have been classified as drugs, two have come under the ambit of price control much against the industry’s wish.First, the National Pharmaceutical Pricing Authority (NPPA) slashed the prices of coronary stents by 85 per cent. The NPPA capped the price of all drug-eluting stents at around Rs 30,000, down from their earlier maximum retail price (MRP) of almost Rs 2 lakh. Then came knee implants. The NPPA brought down the prices of orthopaedic knee implants by 50 per cent.

Lower prices of these devices brought cheer to the consumer as they would have to pay less for at least one component in their hospital bill. For the industry, it was a bitter pill, an analyst said. Soon, the government was flooded with withdrawal applications from companies.

In the case of stents, the government had to invoke section 3(i) of the Drug Price Control Order, 2013, to ensure device makers do not opt out of the Indian market. The provision was invoked for a period of six months ended August. Once again, device makers moved applications for withdrawal. The Department of Pharmaceuticals (DoP) had four applications for withdrawal, which is why it had to re-invoke section 3(i), a source said. This provision suggests that no manufacturer can bring down the production of import of the commodity.

Pre-emptively, the department also invoked section 3 (i)

The Business Standard, New Delhi,18th October 2017

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