The S A Dave-headed mutual fund advisory committee has recommended to the Securities and Exchange Board of India that investors pay the commission to distributors directly. Currently, the commission is deducted from the total investments in mutual funds. This could pave the way for greater transparency in the fund industry.

Another argument favouring this move is that since distributors provide services to investors, the commission should come from them. The commission can also be negotiated, depending on the standard of the service.

The Dave committee, which met on Friday last, also discussed the proportion of money to be compulsorily deployed in bank fixed deposits (FDs) and treasury bills.

At present, a scheme cannot invest more than 20 per cent of its funds in bank FDs and treasury bills put together. At the same time, a fund manager is permitted to take zero exposure to these instruments.

The mutual fund industry has proposed raising the limit to 40 per cent so as to meet unforeseen higher-than-normal redemption pressure without resorting to fire-sale of illiquid assets.

Liquid funds prefer certificates of deposit (CDs) to FDs as the former are tradable and transferable, while the latter are non-transferable. CDs are also preferred over treasury bills because of their higher yield.

However, there is no consensus on raising the limit for investment in FDs as a section of the industry feels that this could make the portfolio more illiquid.

There is also a view that if funds can have up to 40 per cent exposure to these instruments, then there will be little reason for putting money in mutual funds as nothing much will be left to manage. It is likely that this demand will not be accepted by the Sebi.

All liquid schemes will have to ensure that maturity of their investments should not be more than the tenure of the schemes. For incremental investments, Sebi is expected to issue a circular, asking funds to follow this norm immediately, while for investments already made, from next financial year this norm may have to be strictly followed.

In another significant move, the Dave committee has also recommended that the practice of mutual funds declaring indicative return and indicative portfolio be stopped. However, the market regulator may make it mandatory for funds to disclose their entire portfolios once a month on their websites.

Currently, most fund houses do not disclose the extent of exposure they have to pass through certificates (PTCs) and securitised paper.

Further, the committee also discussed hiking the minimum networth requirement for mutual funds from Rs 10 crore (Rs 100 million) to Rs 50 crore (Rs 500 million) and networth of the sponsor to be five times the networth of the fund. However, this may take some time because the advisory committee that includes representations from investors' associations is divided on this issue. A section of the industry feels that mutual fund is the domain of the fund manager. Raising the networth requirement may hamper individual fund managers from entering the asset management space.

The other view is that a strong sponsor can infuse additional capital and provide liquidity support, if required. Several large fund houses such as ICICI [Get Quote] Prudential Asset Management Company and HDFC [Get Quote] AMC are sponsored by large banks. Industry representatives had suggested a minimum lock-in period of five days for liquid funds. However, this view has not been accepted.

The issue of sectoral caps on mutual fund investments was also discussed at the panel meeting. Some funds have over 90 per cent exposure to the banking and financial services sector. Company-wise and industry-wise caps are being discussed by the Association of Mutual Funds in India.

The market regulator has already kick-started the process of revamping mutual fund guidelines. Last week, Sebi announced that close-ended schemes would have to be listed and banned early exits from these schemes. Sebi chairman C B Bhave had hinted that the regulator was looking at several issues related to liquid funds at the time.