BackSebi mulls long term steps to curb redemption risks
Sebi is trying to decide if the 20/25 investor-investment norm for mutual funds needs a changeSebi’s rules need 20 investors to run a mutual fund scheme and one investor cannot hold over 25% of corpus
PremiumMUMBAI : The Securities and Exchange Board of India (Sebi) is considering a series of steps to reduce redemption risks, including increasing the minimum number of investors and a maximum threshold for investment per investor in a scheme, said two people aware of the developement on condition of anonymity.
The existing norms of the markets regulator for mutual funds require at least 20 investors to run a scheme, while a single investor is not allowed to hold more than 25% of the fund’s corpus. Typically, when institutional investors, who invest higher amounts, withdraw their money, it triggers redemption stress. “Imagine a fund with ₹15,000 crore assets under management (AUM) and its top investor, which holds 25% of the corpus, withdraws the entire investment in one day. How will the asset manager meet such a massive redemption pressure brought about by the action of a single investor?" asked the risk management head of a leading fund house.
“Regulations have ensured enough diversification of the portfolio side and the norms are revisited periodically with changing market dynamics. However, there is still a reverse concentration risk present on the liability-side. At present, Sebi is analysing the data to get a sense whether there is substantial risk and whether the 20/25 rule needs to be changed," said one of the two people mentioned above.
The matter will then be referred to the Mutual Fund Advisory Committee, said the second person. “Sebi is considering whether the number of investors can be increased to 50 and the threshold of individual investment reduced to 10-15%. AMCs would be given time to restructure the funds, if in breach, and funds which are unable to meet the new thresholds would need to be either wound up or merged with schemes of similar characteristics. However, a decision will be arrived at only after stakeholder consultation," said the person.
The mutual fund industry has been battling high redemption pressures since the lockdown was imposed to check the spread of coronavirus. The situation worsened after Franklin Templeton India shut down six debt schemes, which had a ripple effect on other credit risk funds that typically invest at least 65% of their assets in lower-rated papers. Investors in credit risk funds redeemed units worth ₹19,238.98 crore in April. Total AUM of India’s credit risk funds plunged 35% from ₹48,576 crore on 24 April to ₹31,357 crore on 15 May.
In certain cases, however, AMCs themselves had put a threshold. For instance, a single investor cannot invest more than ₹50 crore in ICICI Credit Risk Fund.
The liability side has not posed a problem, according to Nilesh Shah, CEO, Kotak Mutual Fund. “So far, in the three crises of subprime 2008/09, taper tantrum of 2013, and coronavirus in 2020, we have not seen the liability side being an issue. Institutional investors have risk management policies to ensure that they are not exposed to a single scheme or single fund house. In overnight funds, a single investor may invest up to 25%, but in a liquid fund the maximum allocation would be 10-15 %. In credit risk funds, it would not even be 10%," said Shah.
In the interim, Sebi has allowed AMCs to invest an additional 15% in government securities and treasury bills to manage redemption pressures in credit risk funds, corporate bond funds and public sector undertaking funds.
However, the 20-25 rule has outlived its utility, according to Vikaas M. Sachdeva, CEO, Emkay Investment Managers. “The 20-25 rule has perhaps outlived its utility. It was useful when the size of funds was not huge. While with portfolio diversification, the asset-side risks have been mitigated, the concentration risks on liability (investor-side) is still there. Either we reduce the liability-side risks or increase disclosures of investor profile," Sachdeva said.
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