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How some mutual fund houses abuse the 10-day cooling period in transmission of MF units

Despite clear guidelines, fund houses delay the redemption of MF investments post completion of the transmission process, presumably to enjoy the liquidity over an extended period of time.

August 19, 2022 / 09:31 AM IST
Representative image.

Representative image.

Despite the Association of Mutual Funds in India (AMFI), the Indian mutual fund industry’s trade body, laying down clear guidelines for transmission of mutual fund (MF) units, quite a few instances have come to light where fund houses delay the redemption of MF investments after completion of the transmission process.

To be sure, transmission of MF units means the transfer of units to the surviving joint holder or the nominee/ legal heir, upon the death of the sole/ joint holder (investor).

Despite laying down a detailed procedure, AMFI has no reference, even remotely, to the time that asset management companies (AMCs) must take to successfully process a transmission request. Here’s where the problem arises.

AMFI guidelines mention a 'cooling period' clause in case of any change in bank mandate which is received simultaneously with or just prior to submission of redemption request. After such request to change the bank mandate a cooling period of 10 days as a matter of precaution is followed.

In simple words, this means that if a change of bank mandate request is submitted (presumably by the primary account holder assuming s/he is still alive) very close to the date on which the redemption request has been submitted, then the fund house will wait for 10 days before processing the redemption request.

Before we elaborate on how some fund houses are taking undue advantage of this 10-day cooling-off period, two more rules need to be highlighted here.

A Securities and Exchange Board of India (SEBI) circular issued in 2012 talks about payment of interest if redemption proceeds are not disbursed within 10 working days from the date of receipt of such requests.

Additionally, SEBI rules also say that if a scheme gets wound up, unitholders must get their redemption within 10 days.

Delay #1

Sitaraman Khamar, an agriculturist from District Khamam, Telangana, was mowed down by a truck at the vegetable mandi and died instantaneously. His daughter Jhansi Rani Khamar, the registered nominee of his investments in mutual funds, submitted all relevant papers to CAMS and Kfin, the RTAs for carrying out the transmission.

The entire transmission process took around 10 days.

In such times, it is important for the legal heir to get access to the money. However, to the daughter’s complete surprise, one of the largest and leading fund houses, said, “Any redemption request submitted prior to 15 days of (transmission request) processing would be rejected.”

The other AMCs accepted the redemption request (without an acknowledgement stamp), but paid the redemption proceeds only on the 10th day from the date of submission.

Delay #2:

Poyeni Patel, who lives in Fremont, USA, was the only child of Mala and Mihir Patel, who lived in Chennai.

Both parents died and basis their Will, a petition was filed at the competent court of jurisdiction, whereby the court awarded the Probate. All assets were bequeathed to their daughter Poyeni.

Her cousin Jolly, who was the registered Power of Attorney (PoA) holder of Poyeni, applied for transmission accompanied by the PoA backed by the Probate on March 9, 2022. The AMCs took close to 10 working days to carry out the transmission, and that too, when they are bound to blindly follow the probate, which essentially is a court order.

A new folio number was allotted and a redemption was sought on March 23, 2022, with a request that the same be credited to the Estate Account of the deceased on the basis of the Probate. Another 10 days passed by.

In the meantime, the financial year (2021-22) ended. The fund house ended up retaining the money beyond March 31, 2022. This brought with itself, a new complication for Poyeni. The redemption, which could have been completed by March 31, 2022, was orchestrated to the next financial year (April 4, 2022), thereby making the incidence of capital gains pushed to FY2022-23.

Therefore, now the Estate would need to file the Estate return of FY2022-23 as well.

Delay #3

An elderly couple Linda and Pascal Rodriques spent their retired lives in Goa. A wealthy seafarer, Pascal had substantial investments in mutual funds, restricting his exposure to only five old-time fund houses.
When his wife died, he was emotionally shattered, and he, too, passed away within a week.

Their only son, who was a practicing dentistry in Sydney, flew down, but for a few days. In such a short span of time, he could only manage to reactivate his NRO Account and apply for transmission of the MF units. The new folios (post transmission) took 12 days and now due to a cooling off period of 10 days, as stated in the AMFI guidelines, due to sheer frustration, he would have to apply online for redemption request.

It is suspected that by delaying the redemption and transmission requests, the fund houses get to enjoy the liquidity over an extended period of time. But this comes at the cost of pain and suffering by the bereaved families.

This irony goes unnoticed and AMCs have successfully exploited the loose ends in the otherwise well laid-out transmission guidelines. Sadly, neither AMFI nor SEBI seem to have noticed this fact.

Why should the due diligence of joint holders / nominees / heirs done by a fund house take 10 days in a digital banking economy?

(Examples and names are merely for illustration purposes)

Rajat Dutta is Founder & Initiator, Inheritance Needs Services
first published: Aug 18, 2022 12:34 pm