New rules for “Inter-scheme” transfer of Mutual Fund

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The Securities and Exchange Board of India (SEBI) has issued a circular, which tighten the norms relating to inter-scheme transfers. The market regulator has said inter-scheme transfers can only be done after other avenues of raising liquidity are attempted and exhausted by a fund house. These include use of cash and cash equivalent assets available in the schemes and selling of scheme assets in the markets.The circular will come into effect from 1st January 2021.

It is at the discretion of the fund manager to use market borrowing before considering inter-scheme transfers or vice-versa. The fund manager would have to take a call keeping in mind the interests of unit holders. The option of market borrowing or selling of security may be used in any combination and not necessarily in the given order. In case the option of market borrowing and/or selling of security is not used, the reason for the same shall be recorded with evidence.

The regulator also wants fund houses to put in place a liquidity risk management model for every scheme to ensure that reasonable liquidity requirements are adequately provided for. Fund houses would need to ensure that there is enough liquidity in their schemes, so that inter-scheme transfers can be avoided. SEBI has also laid down guidelines to avoid misuse of inter-scheme transfers.

No inter-scheme transfer of a security shall be allowed, if there is negative news or rumours in the mainstream media or an alert is generated about the security, based on internal credit risk assessment. If the security gets downgraded within a period of four months following such a transfer, the fund manager of the buying scheme will have to provide detailed justification to the trustees for buying such a security.

To guard against possible mis-use of inter-scheme transfers in credit risk schemes, trustees shall ensure that there are negative consequences on performance incentives of fund managers and chief investment officers, in case the security becomes default grade within a year of such a transfer.

Inter-scheme transfers can be done to correct breaches of regulatory limits pertaining to group exposure, sector, issuer exposure or overall duration of the portfolio. However, different reasons cannot be cited for transferor and transferee schemes except in case of transferee scheme being a credit risk scheme.


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