A 0.35% NAV Error, 214 SIPs and a SCORES Complaint
On 12 February a debt scheme's unit was valued at Rs 11.4523. On 14 February, during a routine valuation review, the AMC discovered that a bond downgraded from AA to A on 10 February had continued to be valued on the earlier yield curve. The correct NAVs were Rs 11.4123 for 12 February and Rs 11.4060 for 13 February, an overstatement of about 0.35%. At the wrong NAVs the scheme had paid out two redemptions (Rs 75 lakh and Rs 12 lakh), received a purchase of Rs 30 lakh, and processed 214 systematic instalments across small folios. The trustees have been informed. Separately, one redeeming investor has already filed a complaint on SEBI SCORES: her proceeds arrived eight days after the prescribed turnaround, and she is demanding interest at 18% per annum. The AMC's operations head wants to know what must be paid, to whom, and on what authority.
1. Who bears the loss from the NAV error, and what does each affected class of transaction receive?
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The AMC bears the loss, not the scheme. A valuation error above the tolerance band in the AMC's error policy and the SEBI valuation framework is an AMC failure. Passing the cost to the scheme would mean unitholders paying for the manager's mistake, which is precisely what the tolerance framework exists to prevent. An error of 0.35% is well outside any tolerance band; the valuation committee should confirm the applicable threshold on record.
Those who purchased at the inflated NAV received fewer units than their money should have bought. They must be made whole by allotting additional units computed at the corrected NAV, or by refunding the difference, at the AMC's cost. This includes the Rs 30 lakh purchase and the 214 systematic instalments.
Those who redeemed at the inflated NAV were overpaid at the scheme's expense. The AMC reimburses the scheme for the excess; it does not claw the money back from investors who redeemed in good faith. Recovery from a retail investor for an error the investor could not detect is neither practicable nor defensible, and would invite regulatory criticism.
Process. Correct the NAV from the date of error, reprocess the affected transactions, notify the trustees, report to SEBI as required by the AMC's policy, and publish a notice if the materiality of the error so requires. Retain the valuation committee minutes, the re-computation workings and the investor communications.
2. How should the 214 systematic instalments be handled operationally, and what should the AMC tell those unitholders?
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Bulk reprocessing, not case-by-case correspondence. The AMC should prepare a single reprocessing file: folio, date, instalment amount, units allotted at the wrong NAV, units due at the corrected NAV, and the differential. A system job allots the fractional additional units, with the cost booked to the AMC and not to the scheme. Each affected unitholder then receives a uniform letter.
Content of the letter.
- State that a valuation error occurred on 12 and 13 February and that the corrected NAV has been applied.
- State the additional units credited and the revised unit balance, with a fresh statement.
- Confirm that no unitholder's holdings were reduced and no money will be recovered.
- Give a contact point and confirm that the correction does not affect the tax cost of acquisition in a way the investor must act on, or explain the position if it does.
Controls to prevent recurrence. The root cause was a failure to apply a downgrade to the valuation matrix on the effective date. The fix is an automated price-and-rating feed with a maker-checker exception report: any rating action must trigger a mandatory revaluation confirmation before the NAV run, and the valuation committee should review a daily exception list of securities with rating actions in the preceding five business days.
3. How should the SCORES complaint about the eight-day delay be handled, and is the investor entitled to 18% interest?
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Treat it as a separate grievance with its own merits. The NAV error does not answer the delay complaint, and the delay complaint does not enlarge the investor's claim on the NAV error. In fact, since she redeemed at the inflated NAV, she was overpaid; the AMC makes good that excess to the scheme and does not adjust it against her delayed-payment claim.
The delay. If redemption proceeds were paid after the SEBI-prescribed turnaround, the AMC must pay interest for the period of delay at the rate prescribed in the SEBI circular - 15% per annum - calculated from the due date to the actual credit date. That is the entitlement; the demand for 18% has no basis and should be declined politely, with the calculation shown.
The grievance process. Respond on SCORES within the prescribed thirty days, with the computation, an apology and confirmation of the credit. If she is not satisfied, she may escalate within SCORES and use the online dispute resolution route. Log the root cause of the delay - typically a name mismatch or an unverified bank mandate - and fix the mandate-verification step so that the same failure does not recur. Keep the tone factual: acknowledge the delay, pay what is owed, and do not contest the NAV correction in a way that looks like a set-off.