11-07-2008, 10:49 AM
KARACHI, Nov 6: Exactly a month after the suspension issuance and redemption of open-end mutual funds (including NIT) with direct exposure to equity securities, the Mutual Fund Association of Pakistan (Mufap) on Thursday threatened to do the same with the open-end income funds.
But the two events stood apart in the sense that while the first had the blessing of stakeholders including Mufap, the second was to be in protest against “the arbitrary” directive of the Securities and Exchange Commission of Pakistan (SECP) asking fixed income mutual funds to revalue Term Finance Certificates (TFCs) downward by 5 to 30 per cent.
Mufap said that the stakeholders were not taken into confidence by the apex regulator before issuing the circular on Wednesday.
Mufap CEO Shamshad Nabi stated that the industry disagreed with the SECP to re-price TFC and that the “Open-end income funds are likely to be forced to temporarily suspend issuance, redemption and pricing of their units”.
Analysts said that the casualty in either case were the investors, who could find their money blocked also in fixed income securities of mutual funds after having suffered a similar situation in open-end equity funds.
But most analysts agreed that the regulator was abrupt and illogical in its decision regarding the income funds. “The measure, if at all it was necessary, should have been gradual, realistic and after a discussion with stakeholders”, a fund manager argued.
Analysts said that the mutual fund industry, which now manages public money running into hundreds of thousands of rupees, would receive a sudden hit, through heavy discounting of the net asset value of income funds, prompting more redemptions.
Mufap suggested in a statement on Thursday that the industry had experienced remarkable growth and was able to pay handsome dividends/return to unit holders. “The industry demonstrated exceptional resilience in the face of acute liquidity problems generally faced by the financial sector and continued to meet redemptions of over Rs80 billion in last six months, of its unit holders”, Mufap observed.
Mr Nabi asserted that the industry had been in constant touch with the government, SBP and SECP and as a result of talks, the government had agreed to guarantee the ‘A’ rated TFCs held in investment portfolio of income funds to enable them to raise liquidity from the banks.
“However, it is unfortunate that instead of meeting the liquidity demand of mutual funds industry as has been done by SBP for banks, there has been dragging of feet by the banking system in organising the liquidity”, contended Mr Nabi.
“And on top of that the SECP has taken a counter-productive step by issuing a circular to re-price TFCs, at a time when the industry was in process of raising liquidity from a consortium of banks and amicable solution was in sight,” he added.
In response to the SECP’s circular of Nov 5, relating to re-pricing of TFCs, Mufap argued that mutual funds were pricing all TFCs as per NBFC Regulations of November 2007 “and it is the considered view of Mufap that the SECP’s arbitrary decision to re-price all TFCs at various discounts has been taken without consultation with the industry and in contradiction of the methodology as stated in SECP’s own rules and regulations.”
Mufap stated that the regulator was informed that a committee was looking into the issue of valuation of fixed income securities and its recommendations would be submitted shortly.
The SECP had, regardless, decided to go ahead with ‘arbitrary pricing formula’, which Mufap thought would not be in the interest of general public or the unit holders, who would have to take ‘unnecessary’ reduction in unit prices as a result of the decision.
“In view of the SECP’s arbitrary decision with regard to re-pricing of TFC and with the view to protect the interest of unit holders, particularly small investors, open-end income funds are likely to be forced to temporarily suspend issuance, redemption and pricing of their units till the matter is resolved”, the Mufap CEO said.
He added that the mutual fund industry had resolved to find a solution “in the best possible manner for its investors within the shortest period of time”.
http://www.dawn.com/2008/11/07/ebr3.htm
But the two events stood apart in the sense that while the first had the blessing of stakeholders including Mufap, the second was to be in protest against “the arbitrary” directive of the Securities and Exchange Commission of Pakistan (SECP) asking fixed income mutual funds to revalue Term Finance Certificates (TFCs) downward by 5 to 30 per cent.
Mufap said that the stakeholders were not taken into confidence by the apex regulator before issuing the circular on Wednesday.
Mufap CEO Shamshad Nabi stated that the industry disagreed with the SECP to re-price TFC and that the “Open-end income funds are likely to be forced to temporarily suspend issuance, redemption and pricing of their units”.
Analysts said that the casualty in either case were the investors, who could find their money blocked also in fixed income securities of mutual funds after having suffered a similar situation in open-end equity funds.
But most analysts agreed that the regulator was abrupt and illogical in its decision regarding the income funds. “The measure, if at all it was necessary, should have been gradual, realistic and after a discussion with stakeholders”, a fund manager argued.
Analysts said that the mutual fund industry, which now manages public money running into hundreds of thousands of rupees, would receive a sudden hit, through heavy discounting of the net asset value of income funds, prompting more redemptions.
Mufap suggested in a statement on Thursday that the industry had experienced remarkable growth and was able to pay handsome dividends/return to unit holders. “The industry demonstrated exceptional resilience in the face of acute liquidity problems generally faced by the financial sector and continued to meet redemptions of over Rs80 billion in last six months, of its unit holders”, Mufap observed.
Mr Nabi asserted that the industry had been in constant touch with the government, SBP and SECP and as a result of talks, the government had agreed to guarantee the ‘A’ rated TFCs held in investment portfolio of income funds to enable them to raise liquidity from the banks.
“However, it is unfortunate that instead of meeting the liquidity demand of mutual funds industry as has been done by SBP for banks, there has been dragging of feet by the banking system in organising the liquidity”, contended Mr Nabi.
“And on top of that the SECP has taken a counter-productive step by issuing a circular to re-price TFCs, at a time when the industry was in process of raising liquidity from a consortium of banks and amicable solution was in sight,” he added.
In response to the SECP’s circular of Nov 5, relating to re-pricing of TFCs, Mufap argued that mutual funds were pricing all TFCs as per NBFC Regulations of November 2007 “and it is the considered view of Mufap that the SECP’s arbitrary decision to re-price all TFCs at various discounts has been taken without consultation with the industry and in contradiction of the methodology as stated in SECP’s own rules and regulations.”
Mufap stated that the regulator was informed that a committee was looking into the issue of valuation of fixed income securities and its recommendations would be submitted shortly.
The SECP had, regardless, decided to go ahead with ‘arbitrary pricing formula’, which Mufap thought would not be in the interest of general public or the unit holders, who would have to take ‘unnecessary’ reduction in unit prices as a result of the decision.
“In view of the SECP’s arbitrary decision with regard to re-pricing of TFC and with the view to protect the interest of unit holders, particularly small investors, open-end income funds are likely to be forced to temporarily suspend issuance, redemption and pricing of their units till the matter is resolved”, the Mufap CEO said.
He added that the mutual fund industry had resolved to find a solution “in the best possible manner for its investors within the shortest period of time”.
http://www.dawn.com/2008/11/07/ebr3.htm