Lack of clear regulation led to an absurd tussle between SEBI and Reliance Mutual Fund over the duration of the statutory warning in the Fund’s ad.

Lack of clear-cut regulation from the Securities and Exchange Board of India (SEBI) on how to calculate the duration of the statutory warning (on the investment risks involved) in mutual fund advertisements has led to a frivolous tussle between Reliance Mutual Fund (RMF) and the market regulator. The tussle has ended with SEBI asking RMF to follow the rules, without being able to prove the precise nature of the violation.

The market watchdog had issued a show-cause notice to RMF and Reliance Capital Asset Management Ltd (RCAML) for Reliance Infrastructure Fund’s recent advertisement, saying that the statutory warning (“Mutual Fund Investments are subject to market risks, please read the scheme information document carefully before investing”) ran for less than 5 seconds, which violated the SEBI circular of 26 February 2008. RMF was asked to withdraw its advertisement immediately. RMF complied and thereafter ran a new advertisement in which the standard warning was for a duration of six seconds. 

Dr KM Abraham, a member of SEBI, in his order issued on Wednesday, stated that RMF had failed to prove that the statutory warning in the advertisement ran for five seconds, even though SEBI, in its notice to RMF, did not mention the actual duration of the statutory warning. He could only claim that the statutory warning in the ad was meant for informing and protecting investors.

SEBI merely charged that the duration of the statutory warning in the CD submitted by RMF was less than 5 seconds. Besides, it argued that if RMF had complied with the SEBI circular, it would not have withdrawn the commercial immediately after the order! This is strange logic. It is as if a motorist, having being asked to pull aside, is asked to prove that he did not violate traffic rules. And also asked, if there was no violation, why did he pull aside?

The source for all this confusion is SEBI itself. While it is bothered that the statutory part of the ad must run for 5 seconds, it has not bothered to specify how to calculate this time period. In a hearing on 1 October 2009, the RMF counsel contended that the measurement of the audio-visual component ought to be from the point at which either the audio or the visual starts, to the point when the last of the two components stops. SEBI had no counter-argument to this view.

To bolster its case in this inane issue, RMF obtained an opinion from an ENT (Ear Nose and Throat) specialist who had stated that the advertisement submitted to SEBI was indeed coherent and comprehensible.

The SEBI circular dated 26 February 2008 increased the mandatory duration of the standard warning in audio-visual advertisements from two seconds to five seconds.