Significant Unit holder

Most unit holders in a scheme are too small for the fund house to notice. A few are not.

A significant unit holder is one of the large ones. The AMFI Code of Ethics draws the line at 5 per cent or more of the scheme's total corpus.

Why does size matter? Because a large holder has leverage. The fund house wants to keep that money. It could be tempted to return the favour — buy the holder's bonds, or shade a deal its way — at the cost of everybody else in the scheme.

So the code does not ban dealing with such a holder. It makes the fund house explain each deal to the trustees, and tell every unit holder about it afterwards.

The definition, from the code's own definitions section. A "Significant Unit holder" means any entity holding 5 percent or more of the total corpus of any scheme managed by the member and includes all entities directly or indirectly controlled by such a unit holder. A member, in the code, means a member of AMFI.

Two parts of that sentence do the work:

What follows once the line is crossed. Clause 3.3 covers transactions of purchase and sale of securities entered into with any associate or any significant unit holder. For each such transaction the member must:

• submit details to the Board of Trustees, justifying its fairness to the scheme; and
• disclose the details of the transaction in brief to unit holders through the annual and half-yearly reports.

The principle behind it. The code's Integrity section requires schemes to be managed in the interest of all classes of unit holders, and not in the interest of a special class selected from out of unit holders. A significant unit holder is exactly the kind of special class that principle guards against. Clause 6.8 pushes the same way from the other end: members shall avoid excessive holding of units in a scheme by few persons or entities.

A related figure, from a different rule. Do not carry the 5 per cent across to KYC. Chapter 9's beneficial ownership rules put an Ultimate Beneficial Owner of a company at more than 25 per cent of its shares. Different document, different purpose, different number.

Godavari Short Duration Fund has a total corpus of Rs 1,250 crore. The figures are illustrative; the threshold and the obligations are the code's.

Step 1 — find the line.

5 per cent of Rs 1,250 crore = Rs 62.50 crore.

Step 2 — add up the holder's group. Trishul Industries Ltd holds Rs 55 crore of units. A subsidiary it controls, Trishul Logistics Pvt Ltd, holds another Rs 12 crore.

Rs 67 crore is above Rs 62.50 crore, so Trishul is a significant unit holder. Taken alone, neither entity would have crossed the line: Rs 55 crore is 4.4 per cent and Rs 12 crore is 0.96 per cent. The control clause is what makes the difference.

Step 3 — the transaction. Two months later the scheme buys Rs 30 crore of commercial paper issued by Trishul Industries itself. Under clause 3.3 the AMC must now place the details before the Board of Trustees with a justification that the deal was fair to the scheme — the yield against comparable paper, the credit rating, the date and the counterparty — and disclose the transaction in brief in the scheme's annual and half-yearly reports.

The purchase is not forbidden. What is forbidden is doing it quietly.

Step 4 — the corpus moves. Heavy redemptions take the corpus to Rs 1,000 crore while Trishul stays put at Rs 67 crore. Its share rises to 6.7 per cent, and clause 6.8's warning about excessive holding by few entities becomes live: one group now holds nearly a fifteenth of the scheme, and its exit would move the portfolio.

Chapter 10 (Legal and Regulatory Environment), section 10.3.1 — the AMFI Code of Ethics, whose definitions section carries this term and whose clause 3.3 carries the obligation. The question is nearly always the number: what percentage of a scheme's corpus makes a unit holder significant (5 per cent), and whether entities it controls are counted (they are). A second form asks what the AMC must do after dealing with one, where the answer has two limbs — a fairness justification to the trustees, and a brief disclosure in the annual and half-yearly reports.

• 5 per cent of the scheme's corpus, not of the AMC's total assets under management, and not of the unit holder's own balance sheet.
• Controlled entities are added in — directly or indirectly. This is the part candidates drop, and it is what turns two sub-threshold holdings into one significant holder.
• It is a disclosure trigger, not a prohibition. The scheme may deal with a significant unit holder; it must justify the deal to the trustees and report it.
• The disclosure has two destinations: the Board of Trustees gets the fairness justification, the unit holders get a brief description in the annual and half-yearly reports.
• The 5 per cent test is the code's, not SEBI's. The more than 25 per cent figure you may be thinking of is the Ultimate Beneficial Owner test in the KYC chapter.
• Associates are treated the same way as significant unit holders under clause 3.3 — the same two obligations follow.