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mutual fund schemes: Sebi tightens guidelines on inter-scheme transfers in mutual fund schemes

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The Securities and Exchange Board of India (Sebi) has tightened guidelines on inter-scheme transfers (ISTs) in mutual fund schemes. The regulator stated inter-scheme transfers for managing liquidity ought to solely be taken in any case different avenues together with utilizing money, market borrowing and promoting securities available in the market, for elevating liquidity have been tried and exhausted.

Inter scheme switch refers to shifting of securities from one scheme to a different throughout the identical fund home executed on the market worth. The regulator has raised issues over this apply because it has been liable to misuse with mutual funds transferring illiquid securities from one scheme to a different.

“If there is still a scheme level liquidity deficit, then out of the remaining securities, outward ISTs of the optimal mix of low duration paper with highest quality shall be effected,” Sebi stated in a round on Thursday.

The regulator stated using market borrowing earlier than ISTs can be elective and fund managers might at their discretion take resolution on borrowing in one of the best curiosity of unit holders. In case, possibility of market borrowing or promoting of safety shouldn’t be used, the explanation for a similar must be recorded with proof.

Fund homes have been accused of transferring illiquid debt papers from a preferred scheme to lesser identified merchandise up to now one yr amid the liquidity squeeze within the bond market.

“This has put greater responsibility on the head of money managers. Whenever such regulations comes it looks like his hands are tied but it’s to ensure that he acts in the best interest of unit holders,” stated a CEO of a number one home fund home. Sebi information present, in FY 2020-21( until finish of August) ISTs of Rs 60,306 crore have been executed. In the month of April, the best variety of ISTs have been executed value Rs 21,815 crore.

The regulator stated in its round if safety will get downgraded following ISTs, inside a interval of 4 months, fund supervisor of shopping for scheme has to offer detailed justification to the trustees for getting such safety.

Besides, no ISTs of a safety must be allowed, if there may be destructive information or rumors within the mainstream media or an alert is generated concerning the safety, based mostly on inside credit score danger evaluation.

Sebi stated ISTs must be allowed solely to rebalance the breach of regulatory restrict. ISTs could be executed the place any considered one of length, issuer, sector and group balancing is required in each the transferor and transferee schemes. Different causes can’t be cited for transferor and transferee schemes besides in case of transferee schemes is being a credit score danger scheme.

“In order to guard against possible misuse of ISTs in Credit Risk scheme, trustees shall ensure to have a mechanism in place to negatively impact the performance incentives of Fund Managers, Chief Investment Officers (CIOs), etc. involved in process of ISTs in Credit Risk scheme, in case the security becomes default grade after the ISTs within a period of one year,” Sebi stated. Adding that the brand new guidelines will turn out to be efficient from January 1,2021.

Sebi stated for shut ended schemes, IST purchases can be allowed inside three enterprise days of allotment pursuant to New Fund Offer (NFO) and thereafter, no ISTs shall be permitted to/from Close Ended Schemes.

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