The Securities and Exchange Commission of Pakistan (SECP) has said that the Rules and S.R.O. 261(1)/2002 (S.R.O.) provide that investment in mutual funds shall not exceed the 50 percent of the fund and investment in single fund not to exceed the 20 percent limit. According to the SECP order issued here on Saturday, the order shall dispose of the proceedings initiated against the trustees of the provident fund (the "respondents") of a company. These proceedings were initiated through a show-cause notice ("SCN") dated August 21, 2015 under the Provident Fund (Investment in listed Securities) Rules, 1996 ("Rules").
The brief facts of the case are that on examination of the annual audited accounts of the Company for the year ended December 31, 2014 ("Accounts") revealed that 66% of the total provident fund was invested in the mutual funds. Rules and S.R.O. 261(1)/2002 ("S.R.O.) provide that investment in mutual funds shall not exceed the fifty percent of the fund and investment in single fund not to exceed the twenty percent limit, SECP said.
Investments in one mutual fund, ie Fund exceed the limit of 20% and investment in provident fund exceed the fifty percent limit, prima facie, in contravention of Rules. Consequently, the SCN was issued to the trustees of the provident fund requiring them to show cause in writing as to why a penal action may not be taken against them in terms of rule 5 of the Rules. The trustees of the provident fund replied vide a letter dated September 4, 2015 and submitted that all investments made by the Fund are in accordance with Rules and SRO and Commission clarification on this matter established that any fresh investments may be assessed at cost for purpose of the Rules.
After the last investment at cost made in mutual fund the total investment in mutual fund as percentage of total provident fund size (including unrealised gains and receivables etc) as at December 31, 2014 was less than 50%, ie, 44.96%. On date of investment in October 2014 this percentage was 47.66%. No investment in one mutual fund at cost is more than 20% of provident fund as at December 31, 2014 actually it was 19.44%. On the date of investment in October 2014 this percentage stood at 20.6%.
While making an investment, the company believes that one needs to make sure that the ceiling set under Rules has not been crossed. The ceiling is based on the cost of investments divided by total fund size which includes all the receivables and unrealised surplus and other being part of the total fund. Before proceeding further, it is necessary to advert to the following relevant provisions of SROs: That the total investment in unit trust schemes registered under asset management companies rules, 1995, shall not exceed fifty percent of the provident fund;
That the total investment in anyone unit trust scheme registered under Asset Management Companies Rules, 1995, shall not exceed 20% of the provident fund. In terms of the Commission''s notification SRO 1003(I)/2015 dated October 15, 2015, the powers to adjudicate cases under section 229 of the Ordinance have been delegated to the Director (Corporate Supervision Department).
The SECP has analysed the facts of the case, relevant provisions of Rules and S.R.O., arguments put forth by the respondent and representative and observed that the respondents were incorrect to assume that the ceiling is based on the cost of investments divided by total fund size which includes the entire receivables and unrealised surplus. The Company itself mentioned in note 42.2 to the Accounts that the investment made in mutual funds during the year is more than the authorised 50% of total investments as per the rules of the fund.
For the foregoing reasons, the SECP is of the firm opinion that the provisions of Rules and SRO have been violated as 66% of the total provident fund was invested in the mutual funds and investment in one mutual fund exceeds the 20% limit. However, the respondents have shown their willingness to rectify the default; the SECP hereby concludes the case with a direction to the respondents to ensure future compliance of applicable legal provisions, SECP added.
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