NEW DELHI,31 May, 2016: To curb discretionary disclosures and ensure more transparency for investors, Sebi today came out with a detailed set of norms on circumstances under which asset management companies can restrict redemptions and such moves should be immediately informed to the market regulator. Asset management companies can impose restrictions on redemptions by investors only when there are issues that could lead to a systemic crisis rather than based on entity instances, Sebi said.
The watchdog's detailed circular -- listing out broad circumstances under which redemptions can be limited by the mutual fund houses -- comes against the backdrop of JP Morgan recently disallowing redemptions in two schemes due to their exposure to the debt papers of a troubled company.
Seeking to put in place a robust framework to protect investor interest, Sebi has also said the possibility of limiting redemptions as well as the time limit should be clearly spelt out in the scheme-related documents.
Now, restriction on redemption would be imposed only for a specified time-period not exceeding 10 working days in any 90 days period.
Any imposition of restriction would require specific approval of Board of AMCs and Trustees and the same should be informed to Sebi immediately, the circular said.
According to the regulator, redemption requests up to Rs 2 lakh would not be subject to restriction. In case, the amount is more than Rs 2 lakh, then the AMCs would redeem the first Rs 2 lakh without any restriction while the remaining amount would be subject to the restriction that is in place.
The new norms would be with immediate effect for all new schemes launched today onwards while it would be applicable for existing ones from July 1.
In the circular, Securities and Exchange Board of India (Sebi) said the restriction can be imposed in circumstances leading to a systemic crisis or event that severely constricts market liquidity or the efficient functioning of markets.
The new norms would be with immediate effect for all new schemes launched today onwards while it would be applicable for existing ones from July 1.
In the circular, Securities and Exchange Board of India (Sebi) said the restriction can be imposed in circumstances leading to a systemic crisis or event that severely constricts market liquidity or the efficient functioning of markets.
Currently, there are no specific provisions requiring fund houses to spell out the circumstance in which restriction on redemption may be applied.
"Recent instances resulting in application of restriction on redemption have necessitated a re-look into the circumstances that require such restriction on redemption," the regulator noted.
JP Morgan Mutual Fund, last year, restricted redemptions from two of its debt schemes after a decline in NAVs (net assets value) of the schemes due to fund house's exposure to troubled auto component firm Amtek Auto BSE -1.58 %.s debt papers. These schemes had a collective exposure of around Rs 200 crore in Amtek Auto.
Issuing the circular, Sebi also said the existing provisions are general in nature and do not specifically spell out the circumstances in which restriction on redemption may be applied; "leading to discretionary disclosures and practices in the industry".
Sebi said restriction on redemption should apply during excess redemption requests that could arise in overall market crisis situations rather than exceptional circumstances of entity specific situations.
The circumstances calling for restriction on redemption should be such that illiquidity is caused in almost all securities affecting the market at large, rather than in any issuer specific securities.
Besides, "when exceptional circumstances are caused by force majeure, unpredictable operational problems and technical failures. Such cases can only be considered if they are reasonably unpredictable
operational problems and technical failures. Such cases can only be considered if they are reasonably unpredictable and occur in spite of appropriate diligence of third parties, adequate and effective disaster recovery procedures and systems."
Further, Sebi said information to investors should be disclosed prominently and extensively in the scheme related documents regarding the possibility that their right to redeem may be restricted in such exceptional circumstances and the time limit for which it can be restricted.
The watchdog's detailed circular -- listing out broad circumstances under which redemptions can be limited by the mutual fund houses -- comes against the backdrop of JP Morgan recently disallowing redemptions in two schemes due to their exposure to the debt papers of a troubled company.
Seeking to put in place a robust framework to protect investor interest, Sebi has also said the possibility of limiting redemptions as well as the time limit should be clearly spelt out in the scheme-related documents.
Now, restriction on redemption would be imposed only for a specified time-period not exceeding 10 working days in any 90 days period.
Any imposition of restriction would require specific approval of Board of AMCs and Trustees and the same should be informed to Sebi immediately, the circular said.
According to the regulator, redemption requests up to Rs 2 lakh would not be subject to restriction. In case, the amount is more than Rs 2 lakh, then the AMCs would redeem the first Rs 2 lakh without any restriction while the remaining amount would be subject to the restriction that is in place.
The new norms would be with immediate effect for all new schemes launched today onwards while it would be applicable for existing ones from July 1.
In the circular, Securities and Exchange Board of India (Sebi) said the restriction can be imposed in circumstances leading to a systemic crisis or event that severely constricts market liquidity or the efficient functioning of markets.
The new norms would be with immediate effect for all new schemes launched today onwards while it would be applicable for existing ones from July 1.
In the circular, Securities and Exchange Board of India (Sebi) said the restriction can be imposed in circumstances leading to a systemic crisis or event that severely constricts market liquidity or the efficient functioning of markets.
Currently, there are no specific provisions requiring fund houses to spell out the circumstance in which restriction on redemption may be applied.
"Recent instances resulting in application of restriction on redemption have necessitated a re-look into the circumstances that require such restriction on redemption," the regulator noted.
JP Morgan Mutual Fund, last year, restricted redemptions from two of its debt schemes after a decline in NAVs (net assets value) of the schemes due to fund house's exposure to troubled auto component firm Amtek Auto BSE -1.58 %.s debt papers. These schemes had a collective exposure of around Rs 200 crore in Amtek Auto.
Issuing the circular, Sebi also said the existing provisions are general in nature and do not specifically spell out the circumstances in which restriction on redemption may be applied; "leading to discretionary disclosures and practices in the industry".
Sebi said restriction on redemption should apply during excess redemption requests that could arise in overall market crisis situations rather than exceptional circumstances of entity specific situations.
The circumstances calling for restriction on redemption should be such that illiquidity is caused in almost all securities affecting the market at large, rather than in any issuer specific securities.
Besides, "when exceptional circumstances are caused by force majeure, unpredictable operational problems and technical failures. Such cases can only be considered if they are reasonably unpredictable
operational problems and technical failures. Such cases can only be considered if they are reasonably unpredictable and occur in spite of appropriate diligence of third parties, adequate and effective disaster recovery procedures and systems."
Further, Sebi said information to investors should be disclosed prominently and extensively in the scheme related documents regarding the possibility that their right to redeem may be restricted in such exceptional circumstances and the time limit for which it can be restricted.
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