The Amtek Auto episode has been a blessing in disguise for mutual fund investors. It got the Securities and Exchange Board of India (SEBI) to awake up to the JP Morgan Mutual Fund blunder. The reaction of the capital market regulator has been so strong that other mutual fund houses will not be able to follow the footsteps of JP Morgan Mutual Fund in future. The investment norms for mutual funds has changed in the recent past. SEBI also issued new disclosure rules, and now it is plugging the last loophole negligence.

SEBI has recently issued a circular tightening the redemption rules. JP Morgan Mutual Fund was believed to have favoured a few institutional investors to exit from two of its troubled schemes that held the tacky debt of Amtek Auto, but imposed restrictions on the redemptions for others.

An open-ended mutual fund scheme allows its investors to buy and redeem units anytime they want. However, fund houses such as JP Morgan imposed restrictions on redemptions without taking their investors into confidence in the past. Mutual funds denying redemptions for saving themselves is not a good sign, in fact it leaves a bad impression on investors.

The new redemption rules will govern all existing and to-be-launched schemes will come into effect on July 01, 2016. After this date, a mutual fund under no circumstances will be able to deny any redemption under an open-ended scheme upto the value of Rs 2 lakh. In other cases, mutual funds can impose the restriction on redemptions only under exceptional circumstances, affecting the market at large.

SEBI, in its circular dated May 31, 2016, has exclusively listed the situations that may qualify as exceptional ones. They include: market liquidity issues (and not the liquidity constrained of mutual funds), market failures, exchange closures, and significant operational and technical failures, among others.

Further, SEBI has clarified that restriction on redemption can be imposed for a period of ten days, only once in a financial quarter. The Board of Asset Management Companies (AMCs) as well as their trustees should approve such restriction and inform the capital market regulator about it as well. SEBI has also asked mutual funds to clearly communicate the redemption restrictions and their applicability in scheme related documents.

Vindicating this move, SEBI said, “Recent instance resulting in application of restriction on redemption have necessitated a re-look into the circumstances that require such restriction on redemption. As a philosophy, restriction on redemption should apply during excess redemption requests that could arise in overall market crisis situations rather than exceptional circumstances of entity specific situations. 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.”

PersonalFN is of the view that, SEBI has taken the right decision to draw-up restrictions on redemptions of mutual funds. The practice of charging exit loads is sufficient to discourage excessive churning. However, restrictions put in place to hide one’s failures are unjust.

 

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