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Business News/ Money / Calculators/  MF’s bad decisions can’t curb redemptions
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MF’s bad decisions can’t curb redemptions

Restrictions on redemptions can be imposed only when the markets at large become illiquid

Aniruddha Chowdhury/MintPremium
Aniruddha Chowdhury/Mint

Taking a cue from the redemption fiasco that unfolded at JP Morgan Asset Management (India) Pvt. Ltd last year, the Securities and Exchange Board of India (Sebi) has said that fund houses will not be allowed to restrict redemptions for amounts up to 2 lakh. The circular, which was issued on 31 May, also gave details on the circumstances under which fund houses will be allowed to restrict redemptions. These rules will be effective for all existing schemes from 1 July.

The back story

In August 2015, the net asset values of two of JP Morgan Asset Management’s schemes fell sharply on the back of a downgrade in Amtek Auto Ltd’s credit rating. Soon after that, the fund house restricted redemptions in these schemes to 1% of each of the two funds’ corpus. In September, cap was lifted but units of both the funds were segregated. The Amtek Auto holding was carved out into separate units, known as side pockets.

Face the defaults

Sebi has made it clear that if a fund house’s investment decision goes bad, it cannot restrict or stop redemptions. The latest circular states that restrictions can be put only when there has been a systemic risk, like a collapse of equity and/or fixed income markets. It could be technical in nature resulting in the markets shutting down, or those that could lead to illiquidity in a large number of scrips. Further, if the markets are on a downward spiral or have become unusually volatile due to which many fund houses are driven to despair, then, too, restrictions can be imposed.

However, there can be no redemption restrictions for amounts up to 2 lakh. For redemption requests above 2 lakh, the fund house will have to return the first 2 lakh without restrictions, and the remaining amount will be subject to a restriction.

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

Industry take

Sebi’s order will prevent fund houses from freely imposing limits on redemptions. However, the mutual fund industry appears to be divided by Sebi’s latest move. “Sebi has clarified on what has always been a well understood and accepted principle, i.e. redemptions cannot stop because of issues in an individual asset or scheme. The fund house needs to manage portfolio liquidity efficiently to ensure smooth inflows and outflows," said Amit Tripathi, chief investment officer-fixed income investments, Reliance Capital Asset Management Co. Ltd.

“In equity investments, decisions can go bad. Under the circumstances—keeping aside JP Morgan Asset Management’s fund managerial skills—the side pocket was the right thing to do then. Does Sebi want to micro-manage how fund managers manage funds?" said a chief executive officer of a fund house who did not wish to be named.

With Sebi tightening debt funds’ investment norms early in 2016, this will be one more reason why fund houses will need to more careful about how they manage their schemes.

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Published: 01 Jun 2016, 06:17 PM IST
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