Chapter 4. The Offer Document

Learning Objective

This unit will give you a good idea of what goes into a New Fund Offer and the legalities underlying the offer documents which are a key source of information for investors and prospective investors.

Under the SEBI guidelines, NFOs other than ELSS can remain open for a maximum of 15 days. Allotment of units or refund of moneys, as the case may be, should be done within 5 business days of closure of the scheme. Further, open-ended schemes have to re-open for sale / re-purchase within 5 business days of the allotment.

Investors get to know the details of any NFO through the Offer Document, which is one of the most important sources of information about the scheme for investors. Investments by the investor are governed by the principle of caveat emptor i.e. let the buyer beware.

Mutual Fund Offer Documents have two parts: (a) Scheme Information Document (SID), which has details of the scheme (b) Statement of Additional Information (SAI), which has statutory information about the mutual fund that is offering the scheme.

In practice, SID and SAI are two separate documents, though the legal technicality is that SAI is part of the SID. Both documents need to be updated regularly.

Offer Documents in the market are “vetted” by SEBI, though SEBI does not formally “approve” them.

KIM is essentially a summary of the SID and SAI. It is more easily and widely distributed in the market. As per SEBI regulations, every application form is to be accompanied by the KIM.

• Offer document is the most important source of information for investors

Contents of the OD

• Details of the sponsor and the AMC
• Description of the scheme and the investment objective
• Terms of issue
• Historical statistics
• Investor’s rights and services
• Fee structure and expenses
• Information on income and expenses of existing schemes

Front page of the offer document contains its date of publication, name & type of fund and its major objectives. Specifically the following

• Name of Mutual Fund
• Name of Scheme
• Type of Scheme (Equity/Income/Balanced)
• Name of AMC
• Unit Price
• Opening, Closing & Earliest Closing date
• Name of Guarantor if the scheme is an assured return
• SEBI disclaimer
• Statement to the effect that it is important for a prospective investor to read it and retain for future reference

More about OD:

• Abridged version of the OD is called as Key Information Memorandum (KIM)

• Investors are required to read and understand the offer document before investing in mutual funds

• No recourse is available to investors for not reading the OD or KIM, as they sign the form stating that they have read the OD

• OD is issued by the AMC on behalf of the Trustees

• KIM has to be compulsorily made available along with the application form.

• Closed end funds issue an offer document at the time of the NFO

• Open ended funds have to update OD at least once in 2 years.

• Trustees approve the contents of the OD and KIM

• The format and content of the OD has to be as per SEBI guidelines.

• The AMC prepares the OD and is responsible for the information contained in the OD

• The Compliance Officer has to sign the due diligence certificate. He is usually an AMC employee

• The due diligence certificate states that:

• Information in the OD is according to SEBI formats
• Information is verified and is a true and fair representation of facts
• All constituents of the fund are SEBI registered

• SEBI does not approve or certify the contents of the OD

• Factors common all funds are called as standard risk factors. These include market risk, no assurances of return, etc.

• Factors specific to a scheme are scheme-specific risk factors in the Offer Document.

• These include restrictions on liquidity such as lock-in period, risks of investing in the first scheme of a fund etc.

• Fundamental attributes of a scheme include its basic features

• For any change in the fundamental attributes, investor approval is not needed. Trustees and SEBI should approve the change.

• Each investor should be informed through a communication and given the option to exit without paying any exit load.

• A scheme can not make any guarantee or return, without stating the name of the guarantor, and disclosing the net worth of the guarantor. The past performance of the assured return schemes should also be given.

• Information on existing schemes and financial summary of existing schemes to be given for 3 years

• Information on transaction with associate companies to be provided for past 3 years

• If any expense incurred is higher than what was stated in the OD, for past schemes, explanation should be given.

• There is no information on other mutual funds, their product or performance in the OD

• Investors’ rights are stated in the OD

• The borrowing instructions on the mutual fund should be disclosed. This includes the purposes and the limits on borrowing

• Investors have the right to inspect a number of documents. These are:

• Trust deed
• Investment management agreement
• SEBI (MF) Regulations
• AMC annual reports
• Unabridged Offer Document
• Annual reports of existing schemes
• 3 years track records of investor’s complaints and redressal should be disclosed in OD

• Any pending cases or penalties against sponsors or AMC should be disclosed in the OD

• The offer document contains detailed information, while the KIM is a summary form of the OD

• If any information is crucial to the investor, it will be found in both KIM and OD. For example, the details of guarantee if the scheme is an assured return scheme.

• The name and addresses of the Trustees and AMC directors will be found in the KIM, but the details of their role, responsibilities and duties will not be found in the KIM, but only in the OD

• The OD and KIM are documents of a mutual fund and there will be no information about other mutual funds in an OD. There will be no comparisons are data on performance of other mutual funds.

• The OD and KIM will not contain names of securities in which the mutual fund plans to invest. Only broad allocation will be given.