Scheme merger becomes cheaper for AMCs after reduction in STT

Since June 2013, four fund houses have merged their schemes post the reduction in securities transaction tax (STT).

The reduction in securities transaction tax (STT) from 0.25% to 0.001% has come as a breather for mutual fund houses. With the new STT rate becoming effective from June 2013, the STT cost has almost become negligible.

Six schemes have merged since June 2013. Mirae Asset Mutual Fund merged Mirae Asset Liquid Fund with Mirae Asset Mutual Cash Management Fund. Reliance Mutual Fund merged Reliance Natural Resources Fund into Reliance Vision Fund. IDFC also merged two of its schemes - IDFC India GDP Growth Fund and IDFC Strategic Sector Equity Fund into IDFC Classic Equity Fund.

On a STT of 0.25%, these six schemes would have had to collectively pay in excess of Rs. 7 crore (calculated based on the combined AUM of the merged and surviving scheme) whereas on a STT of 0.001%, the cost works out to Rs. 3 lakh. Earlier, it was prohibitive for fund houses to merge their schemes.

Merging of two schemes sometimes may result in change in the objective of the surviving schemes. For instance, post the merger of Reliance Natural Resources Fund into Reliance Vision Fund, the investment strategy of the surviving fund has changed. This amounts to change in the fundamental attributes of the surviving scheme. Apart from providing an exit option (without any exit load) to the scheme which is getting merged, the fund house had to also provide an exit option to the investors of surviving schemes. On a STT of 0.25%, Reliance Natural scheme (on AUM of Rs. 978 crore) had to shell out Rs. 2 crore whereas with the revised STT of 0.001%, the STT works out to Rs. 97800.

Normally, the fund managers decide which schemes need to be merged. Usually, non-performing schemes or those which have a small AUM are merged with bigger funds. The shares held by the scheme which is getting merged are transferred to the surviving scheme. This results in increase in the number of units, AUM and the investor base of the surviving scheme. While the schemes never sells the existing portfolio technically it is treated as ‘redemption’ in the scheme which is getting merged and ‘purchase’ in the surviving scheme. SEBI rules require that investors are given 30 days period to exit from the scheme at the prevailing NAV without paying any exit load. Investors can also chose to remain invested in the fund.