Market regulator Securities and Exchange Board of India (Sebi) on Thursday tightened norms for inter-scheme transfers (ISTs) for mutual funds, imposing conditions on when the facility can be used and putting greater accountability on fund managers deciding on such transfers.
ISTs involve buying or selling a debt instrument from another scheme of the same fund house. The practice can create conflicts related to valuation, a matter flagged by the Sebi earlier.
ISTs for close-ended schemes will only be allowed within three business days of the new fund offer. Earlier, such transfers could be done any time as long as the average maturity profile of the scheme was maintained.
Open ended schemes will be allowed to do ISTs only if all other avenues – use of scheme cash and cash equivalent, market borrowing and selling securities in the market – are exhausted.
ISTs will be allowed to rebalance only on breach of regulatory limits or where any duration, issuer, sector and group rebalancing is required in both the transferor and transferee schemes.
Trustees are now required to put in place a mechanism to negatively impact the performance incentives of fund managers involved in process of ISTs in credit risk schemes, in case the security becomes default grade after the ISTs within a period of one year. Such negative impact on performance shall mirror the existing mechanism for performance incentives of the AMC
ISTs of a security will not be allowed if there is negative news or alert in the mainstream media about the security. Fund managers have to provide detailed justification to trustees for buying securities that get downgraded withing four months of the IST.
“The regulator’s intent is to protect investors and to ensure that funds do not resort to such transfers to hide bad papers. But in doing so, it has completely taken away the flexibility for effecting such transfers, which will now be restricted to high-grade and liquid papers alone,” said a senior fund official.
Dear Reader,
Business Standard has always strived hard to provide up-to-date information and commentary on developments that are of interest to you and have wider political and economic implications for the country and the world. Your encouragement and constant feedback on how to improve our offering have only made our resolve and commitment to these ideals stronger. Even during these difficult times arising out of Covid-19, we continue to remain committed to keeping you informed and updated with credible news, authoritative views and incisive commentary on topical issues of relevance.
We, however, have a request.
As we battle the economic impact of the pandemic, we need your support even more, so that we can continue to offer you more quality content. Our subscription model has seen an encouraging response from many of you, who have subscribed to our online content. More subscription to our online content can only help us achieve the goals of offering you even better and more relevant content. We believe in free, fair and credible journalism. Your support through more subscriptions can help us practise the journalism to which we are committed.
Support quality journalism and subscribe to Business Standard.
Digital Editor
RECOMMENDED FOR YOU