Sebi tightens inter-scheme transfer norms for mutual funds

MUMBAI: The Securities and Exchange Board of India (Sebi) on Thursday tightened inter-scheme transfer (IST) norms for mutual funds to further safeguard investors’ interest, and said such rules will be applicable from January 1.

As per the current norms, transfers of securities from one scheme to another scheme in the same mutual fund is allowed only if such transfers are done at the current market price for quoted instruments on spot basis and such securities have to be in sync with the investment objective of the scheme to which the transfer has been made.

The market regulator said in case of close-ended schemes, IST purchases will only be allowed within 3 business days of allotment after the new fund offer (NFO).

In the case of open-ended schemes, the mutual funds should have an appropriate Liquidity Risk Management (LRM)
Model at scheme level, approved by trustees, to ensure that reasonable liquidity requirements are adequately provided for, the market regulator said.

However, in case of a sudden redemption pressure, AMCs should resort to ISTs for managing liquidity only after exhausting options such as the use of cash and cash equivalents, markets borrowing, and selling of scheme securities in the market. If there is still a scheme level liquidity deficit, then out of the remaining securities, outward ISTs of the optimal mix of low duration paper with only highest quality should be effected.

To meet duration, issuer, sector and group rebalancing norms, ISTs will only be allowed to rebalance the breach of regulatory limit, and can be carried out if such rebalancing is required in both – transferor and transferee schemes.

Sebi also stipulated that different reasons cannot be cited for transferor and transferee schemes except where transferee schemes is a credit risk scheme.

It also said that in order to guard against a possible misuse of ISTs in credit risk scheme, trustees should ensure that there is a mechanism in place to negatively impact the performance incentives of fund managers, chief investment officers (CIOs), etc. involved in process of such transfer, if the security becomes default grade within a year of the transfer.

Sebi has disallowed ISTs of a security if there is negative news or rumors in the mainstream media or an alert is generated about the security, based on internal credit risk assessment during the previous four months. In the event such security gets downgraded within four months of IST, the fund manager of the buying scheme will provide detailed justification to the trustees for buying it.