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SEBI Tightens Norms Governing Inter Scheme Transfer OfSecurities Within Mutual Funds

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The Securities and Exchange Board of India has tightened the norms governing inter-scheme transfer ofsecurities within a same mutual fund.

It has issued a circular prescribing additional safeguards for such transfers within schemes of open- orclose-ended funds which may arise due to situations like meeting liquidity requirement arising fromunanticipated redemption pressure or achieving prescribed sectoral or group rebalancing requirements.The circular will come into effect from Jan. 1, 2021.

Inter-scheme transfers came into the limelight after the winding up of credit risk schemes by FranklinTempleton, leading to increased redemption pressures on fund houses. Some investors pointed outconcerns regarding such transfers within schemes of ICICI Prudential Mutual Fund earlier this year.

The additional safeguards, according to the market regulator, have been introduced to ensure thetransfer of quoted instruments within a mutual fund are done in on-the-spot basis, at prevailing marketprices and conform to the investment objective of the scheme to which the securities are transferred.

SEBI has prescribed the following additional safeguards:

  • Purchases under inter-scheme transfers in close-ended schemes will be allowed only within threebusiness days of allotment under a new fund offer. No transfers will be allowed from the fourthday.
  • Transfers of securities will also be prohibited in case of negative news, rumours in themainstream media or presence of an alert relating to deteriorating credit profile of the securityissuer during the last four months.
  • Open-ended schemes must resort to such transfers only after exhausting all other availableliquidity generation options like market borrowings, using the schemeโ€™s cash or selling itssecurities in the market.
  • Mutual funds can resort to inter-scheme transfers for rebalancing purposes only to the extent ofrebalancing the breach of regulatory limits prescribed by SEBI.

Sumit Agrawal, founder of Regstreet Law Advisors, said the circular restricts the free inter-schemetransfer to a narrow compass in the wake of recent inspections and certain forensic audits. Stricttimelines and scheme level liquidity risk management is a step ahead in enforcement, he said.

A negative news or rumor in the mainstream media has been given legal weight for decision making,and to add to the challenges of alpha fund managers, a subsequent downgrading of a security will leadto questioning the decision in hindsight, he said.

To ensure further accountability, the market regulator also stipulated that the fund manager of a schemewhich buys securities under an inter-scheme transfer must provide rationale for such a move if there is asecurity downgrade within four months from the buy transaction.

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