At Madhuvan Mutual Fund, a missed 1:1 bonus issue understated an equity fund's NAV by 0.9% for three days, during which investors bought Rs 45 crore and redeemed Rs 30 crore. Who was harmed, by how much, and who pays to put it right?

Three groups are affected in different directions: buyers gained about Rs 40.9 lakh of extra units, leavers were underpaid about Rs 27.2 lakh, and continuing investors bore the difference. The AMC, not the scheme, pays: about Rs 27.2 lakh to the investors who redeemed and Rs 40.9 lakh into the scheme, Rs 68.1 lakh in all. A price tolerance check and a daily holdings reconciliation should have caught a top holding halving on day one.

If a shop mislabels a Rs 100 item at Rs 99.10 for three days, the people who buy it get a small gift, and the owner loses it. If the same shop also buys that item back from customers at the wrong label, the sellers are short-changed. A NAV is the price at which a fund both sells and buys back its units, so an error in it moves money from one group of investors to another, in opposite directions. Madhuvan's error was 0.9%, well above the materiality threshold SEBI's framework sets for NAV errors, which has been 0.1% of NAV; confirm the current rules, which also set out how the AMC must compensate. Investors who bought paid too little; investors who redeemed received too little; investors who stayed carried the net effect.

Work it through units. Rs 45 crore at Rs 49.55 bought 90.82 lakh units; at Rs 50.00 it should have bought 90.00 lakh. The extra 81.7 thousand units are worth Rs 40.9 lakh at the correct NAV, and that value came out of the pockets of everyone already in the fund. Leavers were paid Rs 30 crore for units worth Rs 30.27 crore, a shortfall of Rs 27.2 lakh, which stayed in the fund. Continuing investors therefore lost Rs 40.9 lakh to the buyers and kept Rs 27.2 lakh from the leavers: a net loss of about Rs 13.6 lakh if nothing were done. Small against a Rs 5,000 crore fund, but the principle does not scale with size.

The AMC. The error was the AMC's operational failure, so the scheme and its investors may not bear it. Each group is put back where a correct NAV would have left it: the AMC pays the Rs 27.2 lakh shortfall to the investors who redeemed, and pays Rs 40.9 lakh into the scheme to make good the extra units issued to buyers, so the continuing investors are whole. Recovering the gain from the buyers themselves is usually impractical for small amounts and the framework generally leaves it with the AMC; confirm the current treatment and the de minimis rules. The AMC also recomputes and republishes the three NAVs, reports the error to the trustees and SEBI, and tells affected investors.

Because the controls that existed were looking at the wrong thing. The price feed was right; the share count was wrong, and nothing compared them. Three checks would each have caught it on day one. A price tolerance check that flags any holding moving more than, say, 20% in a day and demands an explanation: a 50% fall in a stock whose sector was flat is a bonus, a split or an error, never a market move. A daily reconciliation of holdings against the custodian's records, which would have shown 15 lakh shares in the depository against 7.5 lakh in the books; the reconciliation existed but ran weekly. And a NAV movement check against the benchmark: the fund fell 0.6% on a day its benchmark rose 0.3%, a 0.9 point gap no diversified fund produces without a reason. The fix is a second, independent source for corporate actions and a rule that no NAV is released while a tolerance exception is open.