Cut-Off Processing: From an Order to Allotted Units

Between an instruction and a unit balance sits a run of work. A point of acceptance takes the application and stamps it. The money travels its own route. Once the day has closed, the scheme computes one value per unit. Applications considered against that value are divided into units, and a record keeper writes the result against a holder's account. Which day's value applies turns on when both arrivals landed.

A holder gives an instruction. Something comes back saying it had been received. Days later a unit count appears, and it is not the number the holder had worked out. Nothing went wrong, and nobody made a mistake, but the holder has no picture at all of what happened in between. The interval between the receipt and the unit count holds the whole answer.

Girnar Asset Management Limited, an invented fund house, runs the Girnar Large Cap Equity Fund, an open ended equity scheme with net assetsWhat a scheme holds after subtracting what it owes, which is the amount the unit count is divided into. of Rs 4,200 crore and 120.00 crore units in issue. The first figure divided by the second gives one unit worth Rs 35.00 exactly. Kalyani Bhagat manages the portfolio. Sohail Merchant heads operations.

Three things are covered separately: what a unit is, how one value per unit is computed out of a scheme's books once a day, and what a cut-off is as an idea. The machinery on either side of that line has not been settled anywhere, and nearly every question a holder actually asks turns out to live there.

What is cut-off processing, if the cut-off itself was settled earlier?

The cut-off is a line. Cut-off processingEverything a scheme does after an instruction lands and before a number of units stands against a holder in its records. is the run of work that happens on either side of that line, and knowing the first says almost nothing about the second. A queue at a government counter works the same way. The shutter coming down says nothing about the clerk's handling of the form afterwards, who checks it, what happens if a column is blank, or when a name appears on a list. The shutter is one fact. The processing is everything else.

Laid out in order, the run has five stages, and the reason it feels opaque is structural rather than anybody's fault. An application lands somewhere and gets stamped. Separately, the payment sets off. Once the day has shut, the scheme works out one value per unit from what it held and owed. The division is carried out and units are entered. The holder record is updated and a confirmationThe line a holder finally gets to read on a statement, after units have been entered to their name. follows. Out of those five stages a holder is present for the opening one and the closing one, and all three that settle the answer happen somewhere nobody outside the scheme can look.

What does a time stamp actually establish?

An application is handed in at a point of acceptanceAny counter, desk or electronic channel through which a scheme agrees to take an application in., and it is stamped. The time stampA mark showing when something was handed in. The mark proves the handing in and settles nothing that comes after. is the single artefact of this whole run that a holder ever physically holds. Being the one thing a holder can hold is exactly why the stamp gets over-read.

A courier receipt behaves the same way. The receipt proves the parcel entered the network at a particular counter. The receipt does not itself promise a delivery date, and it certainly does not create the delivery schedule. The schedule exists separately, is written by somebody else, and can change without a single word on the receipt changing. The stamp proves that a landing took place. The rule that converts a landing into a claim on one particular day's computed value is an entirely separate object, written by the Securities and Exchange Board of India (SEBI) and changed more than once. Anyone reading the stamp as though it were that rule has mistaken a record for a rule, and the two have different authors.

Which of the two arrivals can a holder never watch?

Two things have to reach the scheme, not one. The application is the first. The money is the second, and the two arrivalsTwo things that must both get to a scheme, the paperwork and the payment, moving on separate routes at separate speeds. travel by completely different routes. The instruction may go through a distributor, an electronic channel or a counter. The money moves through the banking system on its own rails, with its own checks, its own reasons for stopping and its own record of having got there.

Consider a wedding invitation posted and the gift couriered separately. Both are addressed to the same household. The two leave on the same morning. The two do not arrive on the same morning, and the one that can be tracked is rarely the one that matters. The instruction can be watched going while the payment offers no window at all. The landing that cannot be seen is very often the one that settles the result. The unseen landing is the single most common reason a unit count surprises somebody.

Why must a line separate one day's value from the next?

One half of this subject stays true no matter what any rule says next year, and it is the half worth slowing down for. A value per unit for a given day is assembled out of that day's facts. The holdings, priced at that day's close. The obligations, standing at that day's close. The second subtracted from the first gives net assets. Divided by the units in issue, that gives one figure for that day. StrikingWorking out what one unit is worth for a given day, once that day has shut and from that day's figures alone. that figure is a closing act, and it can only use what was true at the close.

Now put the question the other way round. If a figure computed out of one day's facts were allowed to absorb money that turned up afterwards, what would the figure mean? The figure would be describing a pool that did not exist. Somebody would hold units against money the scheme did not have. The reason a line has to exist somewhere is arithmetic and does not move. Where that line falls is a rule, is SEBI's to write, and has been revised. The arithmetic and the rule age at completely different rates, and holding the two apart is most of the discipline of this subject.

What would it cost if a computed value took in something that landed afterwards?

An assertion that value would move is worth much less than a figure, so pricing it out is worth the trouble. No scheme admits an application ahead of its money. The arithmetic below runs on that impossible assumption, to show exactly what the line prevents.

Start from the value itself. Rs 4,200 crore of net assets shared among 120.00 crore units in issue comes to Rs 35.00 a unit exactly. An application of Rs 1,00,000/- divided by Rs 35.00 gives 20,000 over 7. The quotient is 2,857.142857 and does not stop there, so it is carried to three decimals and rounded up to 2,857.143 units. Note which way that rounding went. The direction comes back in a moment.

Now imagine, purely to watch something break, that those 2,857.143 units were entered while the Rs 1,00,000/- was still somewhere in transit. While that holds, the units in issue read 1,20,00,02,857.143. Nothing was put into the pool, so net assets read Rs 4,200 crore as before. Divide again: Rs 42,00,00,00,000/- over 1,20,00,02,857.143 units gives Rs 34.99991667 a unit.

The residues are where sloppy arithmetic hides. Read them before the headline. Line two rounded upwards, from 2,857.142857 and continuing, to 2,857.143. The backwards check then multiplies those units by Rs 35.00 and lands on Rs 1,00,000.005. Rs 1,00,000.005 is half a paisa more than the money paid, and it sits exactly halfway between two paise. Stating it to the paisa means silently choosing a rounding rule. The remainder makes that a real check rather than a restatement. Line four rounded upwards too, from a figure continuing past the eighth decimal, and line seven rounded upwards from Rs 99,999.766905 and continuing. The final check row is exact. Nothing was created and nothing was destroyed, so the two claims sum back to Rs 42,00,00,00,000/-.

Measured on one unit the damage cannot be seen at all, measured across the whole scheme it is precise, and it comes out at almost exactly the Rs 1,00,000/- that never landed. On a single unit it reads Rs 0.00008333, or 0.00023809 per cent of Rs 35.00, and it would vanish in the rounding on any statement anybody will ever be handed. Summed instead, those 2,857.143 units carry a claim of Rs 99,999.77 on a pool nothing was paid into. Everybody who had already paid is holding Rs 99,999.77 less than a moment before. The pool stayed the size it was, so one figure serves twice.

One warning about a pattern that looks like proof and is not. The drop of 0.00023809 per cent on each unit is precisely the newcomer's share of the pool, 2,857.143 units over 1,20,00,02,857.143. The two figures are not independent routes agreeing. The two figures are one identity written twice: the fall in the value per unit divided by the old value is one minus the ratio of the old unit count to the new one. Simple rearrangement turns that into the new units over the new total, and the identity holds exactly at the unrounded 20,000 over 7. Saying it is a check would be self flattery. The genuine backwards check is the multiplication in the check row, and it produces a residue of half a paisa rather than a tidy agreement. A residue is the only kind of confirmation that could have failed.

Who chooses the number of units an application receives?

Nobody. The answer is that blunt, and it surprises people. Once the day has closed, the scheme values what it held, subtracts what it owed and divides by the units in issue. The three steps produce one figure. Every application considered against that figure is then divided by it, and the quotient is the unit count. AllotmentEntering a number of units to somebody's name once the sum has been worked out. is a sum done against a figure that was settled before the application arrived, rather than a bargain struck or an opinion formed about any one holder.

The everyday version is a wedding caterer weighing out sweets. The rate for the day was fixed before anyone queued. Whether the customer hands over Rs 500/- or Rs 50,000/-, nobody at the counter decides how much comes back; the scale does, at the rate already set. The convention for the last fraction is all that is left, and it is the only place a choice is made at all. On the Girnar Large Cap Equity Fund the Rs 1,00,000/- application divides to 2,857.142857 and continuing. The scheme's stated convention carries it to three decimals, so the confirmation reads 2,857.143 rather than an endless figure. The rounding convention is the scheme's own, printed in its documents, and is that scheme's practice rather than anybody's rule.

Where in this run does the registrar and transfer agent sit?

Three different records exist inside a scheme and they hold three different things. The portfolio is one record, and Kalyani Bhagat, who manages the Girnar Large Cap Equity Fund, works entirely inside it. The scheme's own books are the second, and it is out of those that one value per unit is computed at the close. The registerThe list a scheme keeps of who stands behind how many units, one account at a time. is the third, and it is the only one of the three that has ever heard of the holder.

The register is maintained by the registrar and transfer agentThe outfit that looks after who holds what in a scheme and posts each purchase or exit to that list.. The agent posts the units to a folioThe account in a scheme's records against which one holder's units are held., carries the running balance, and puts out the confirmation that reaches the holder in the end. Kalyani Bhagat's work stops at the portfolio and never touches a holder's balance at all, so a question about missing units goes to a record keeper and not to a fund manager. Sohail Merchant, who heads operations at Girnar Asset Management, sits between the two, which is a job about instructions and records rather than about holdings.

What can be rechecked on a confirmation, and what cannot?

A confirmation carries four things that can be tested with a pencil, and one thing that cannot be tested at all. The amount is the money sent. The value per unit is stated. The date that value belongs to is stated. The unit count is stated to three decimals. The third multiplied by the fourth should land within the rounding convention of the first, and on this scheme that check reads 2,857.143 times Rs 35.00 is Rs 1,00,000.005 against the Rs 1,00,000/- paid, a remainder of half a paisa produced by rounding the units upwards.

Whether the right day's value attached in the first place cannot be tested at all. The gap is not a defect in the document; it follows from the nature of the document. A confirmation records what happened. The confirmation does not carry the conditions under which what happened was correct, and those conditions turn on when each of the two arrivals landed relative to a line whose position SEBI sets. A holder who knows exactly which question the document cannot answer knows exactly where to take it instead. Naming the unchecked thing is therefore far more useful than pretending the confirmation settles it.

Where does this run break, and does it break in only one place?

The run breaks in three places, and they are three genuinely different problems. An incomplete application never gets past acceptance, so there is nothing downstream to look for. A transfer of money that fails stops the second arrival, so the instruction is sitting there complete and the funds are not. An account reference that fails to match leaves the units with nowhere to go, so a number has been produced and there is no name to put it under. Three break points, three remedies, and a holder who reports only that their units have not appeared has handed the record keeper none of the three.

A parcel that has not arrived at a household works the same way. The parcel was never handed over. The parcel was handed over and is stuck somewhere. The parcel arrived and was left at the wrong door. Saying only that the parcel is missing describes all three equally, and each has a different person to call. The same discipline pays here: name the last stage for which evidence exists, and hand over that evidence. How long each of the three takes is bound up with the conditions SEBI sets.

Why does a stated deadline go wrong faster than the arithmetic?

Because the two halves of this subject age at completely different rates. Why a line has to exist is arithmetic, and the arithmetic worked above will read exactly the same in ten years. Where the line falls is a rule. The rule is SEBI's to write, it applies differently by the kind of scheme and the kind of instruction, there is a separate condition about the money having reached the scheme, and every one of those has been revised. A deadline written down would not become dated when the conditions next change; it would become wrong, and a confidently wrong sentence about a deadline is far more damaging than a blank with an address beside it.

The blank points somewhere. SEBI publishes the version in force at sebi.gov.in, and each scheme sets out the governing version in its own documents. Knowing the shape of the run, knowing that two arrivals matter rather than one, and knowing exactly which question belongs to which document is worth far more than a number that quietly expired.

Girnar Asset Management Limited, the Girnar Large Cap Equity Fund, Kalyani Bhagat and Sohail Merchant are invented.
Educational material. Not advice on any investment, tax, budget or market position.