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Accrording to the new Sebi norms, restrictions on redemptions can be imposed only for a specified period of time that cannot exceed 10 working days in any given 90-day period. Photo: Aniruddha Chowdhury/Mint
Accrording to the new Sebi norms, restrictions on redemptions can be imposed only for a specified period of time that cannot exceed 10 working days in any given 90-day period. Photo: Aniruddha Chowdhury/Mint

Sebi eases redemption norms for mutual fund investors

As per the new Sebi rules, no redemption requests of up to Rs2 lakh will be subject to restrictions; beyond that, the remaining money can be subject to any restriction imposed by an AMC

Mumbai: The capital markets regulator has allowed investors to at least partially withdraw their money from a mutual fund scheme even if an asset management company (AMC) imposes restrictions on redemptions.

Under the new Securities and Exchange Board of India (Sebi) rules, no redemption requests of up to 2 lakh will be subject to restrictions. For redemption requests above 2 lakh, AMCs will redeem the first 2 lakh without restriction while the remaining money can be subject to any restriction imposed by the AMC.

Further, restrictions on redemptions can be imposed only for a specified period of time that cannot exceed 10 working days in any given 90-day period.

Imposing redemption limits gives AMCs time to restructure investments and restore liquidity in a scheme whose underlying assets may have eroded steeply because of an internal crisis or extreme market conditions.

 “This is hugely investor-friendly. Since most of the retail investments are below or around 2 lakh, Sebi’s approach is in the right direction," said Lakshmi Iyer, chief investment officer of debt and head of products at Kotak Mahindra Asset Management Co. Ltd.

“This will keep the liquidity intact within schemes and will help in better diversification of assets within the fund, which is beneficial for both investors and the fund manager."

Mutual funds can currently impose restrictions on redemption after approval from the board of the AMC and trustees.

Sebi’s order will prevent AMCs from freely imposing limits on redemptions in any of their schemes at any time, merely with a board or trustee approval.

On 29 April, Mint first reported that while gating any scheme, Sebi wants the AMC to first allow redemptions of at least up to 2 lakh to every investor in the scheme, and thereafter, it may impose a daily redemption limit on the remaining amount of investment.

Sebi said on Tuesday that the current 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.

“Recent instances resulting in application of restriction on redemption have necessitated a re-look into the circumstances that require such restriction on redemption… 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," Sebi said in a circular.

Sebi’s move assumes significance in the backdrop of a redemption crisis that occurred in two schemes of J.P. Morgan Asset Management India in September. Sebi wants to ensure that in future, investors do not suffer during such a crisis and are able to withdraw their investments, fully or partially, when they want to.

In September 2015, J.P. Morgan Asset Management India had to gate two of its debt schemes, which had a 193-crore combined exposure to Amtek Auto Ltd’s fixed-income papers, which were downgraded sharply by rating agencies due to the company’s deteriorating financials, resulting in a steep erosion in the value of the two schemes.

The crisis compelled the AMC to impose a daily redemption limit of 1% (of the investment value) for investors in the two schemes.

Later, J.P. Morgan Asset Management India created a side-pocket for schemes to separate the troubled debt from other assets—a move that helped the AMC lift curbs on redemptions.

Sebi on Tuesday also announced the conditions under which asset managers can restrict redemptions. They can do so in circumstances leading to a systemic crisis or an event that severely constricts market liquidity or the efficient functioning of markets.

The market watchdog said restrictions on redemptions can be imposed during times when the market at large becomes illiquid, affecting almost all securities rather than any issuer-specific security.

Also, if the market is hit by unexpected events related to political, economic, military, monetary or other emergencies, which impact the functioning of exchanges or the regular course of transactions, AMCs can impose restriction or limits on redemptions, Sebi said.

The latest norms will be effective for all existing schemes from 1 July.

In order to avoid a JP Morgan-like crisis in future, Sebi on 12 January tightened the investment norms for debt-oriented mutual funds and introduced caps on how much they can invest in debt issued by a single company, a business group or to a specific sector.

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