A recent advertisement by Principal Mutual Fund that promises a dividend of 400 per cent in February 2006 for fresh investors in one of their schemes has caught the attention of the market regulator.Two days after the ad reached investors, a senior Securities Exchange Board of India (Sebi) official confirmed that it has sent the fund house — a JV between Principal, PNB, and Vijaya Bank — a showcause notice, asking why action should not be taken against it. The ad proclaims: ‘‘Save taxes with Principal Personal Tax Saver Fund and benefit from 400% dividend.’’A disclaimer, in a relatively illegible font size says, ‘‘Proposed dividend in February 2006. The actual dividend payout may be higher or lower than the proposed dividend. After the payment of dividend, Rs 40 on a face value of Rs 10, the Net Asset Value (NAV) will fall to the extent of the payout.’’According to lawyers familiar with mutual fund regulations, this ad is a violation of Sebi rules. Regulation 53, for instance, says that dividend warrants should be dispatched to investors within 30 days of declaring a dividend.‘‘Though the ad only proposes a 400 per cent dividend, it is tantamount to a declaration. The fund could be asked to pay the promised dividend within 30 days and not in February 2006 as stated,’’ says a lawyer.Principal Mutual Fund’s CEO Sanjay Sachdev, however, denies that the ad is unique. Sachdev also denies receiving a showcause notice. ‘‘This has been an industry trend of announcing dividends ahead of their actual declarations. In our case, Sebi informed us in a letter that it wasn’t happy about us announcing the dividend so much in advance. We accepted Sebi’s point and withdrew the ad voluntarily to set a precedent.’’While announcing dividends in advance does appear to be an industry trend, this case clearly stretched the concept. The finance ministry will not be amused either as the scheme allows investors to indirectly evade taxes. The scheme in question is an equity-linked saving scheme (ELSS) that gives investors tax benefits under Section 80 C (2) of the Income Tax Act 1961. But to avail of the tax benefits, investors have to lock-in their funds for at least three years. However, Principal’s ploy allows investors to get a substantial part of their investment back within three months. And while the fund may indeed be confident about keeping its word — current NAV is Rs 131.7 per unit — unpredictable markets could put paid to any fund’s position three months from now.
