The Securities and Exchange Board of India (“SEBI”) issued a circular pertaining to the guidelines on Inter-Scheme Transfers (“ISTs”) of securities within the same mutual fund. The Circular will be applicable with effect from January 1, 2021.
ISTs are allowed only if:
They are carried out at the prevailing market price for quoted instruments on spot basis and,
The securities transferred are in conformity with the investment objective of the scheme to which the transfer has been made.
In order to further ensure conformity with the above objectives, SEBI has prescribed the following additional safeguards vide the Circular:
Close-ended Schemes: No ISTs shall be permitted to/ from Close Ended Schemes, except within 3 (three) business days of allotment pursuant to New Fund Offer (NFO).
Open-ended Schemes: ISTs may be allowed in the following cases:
a. In order to meet liquidity requirement in a scheme in case of unanticipated redemption pressure – Asset Management Companies (“AMCs”) are required to maintain an appropriate Liquidity Risk Management (LRM) Model at scheme level, which is approved by trustees, to ensure that reasonable liquidity requirements are adequately provided for. Further, recourse to ISTs should be taken only after the prescribed avenues for raising liquidity have been attempted and exhausted.
b. For duration/ issuer/ sector/ group rebalancing –
i. ISTs shall be allowed only to rebalance the breach of regulatory limit.
ii. ISTs can be done where any one of duration, issuer, sector and group balancing is required in both the transferor and transferee schemes. However, different reasons cannot be cited for transferor and transferee schemes except where the transferee scheme is a Credit Risk scheme.
iii. Trustees should have a mechanism in place to negatively impact the performance incentives of Fund Managers (“FMs”), Chief Investment Officers (“CIOs”) etc. involved in the process of ISTs in Credit Risk scheme, in case the security becomes default grade after the ISTs within a period of 1 (one) year.
Furthermore, no ISTs of a security shall be allowed 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 by the AMC during the previous 4 (four) months. If the security gets downgraded following ISTs, within a period of 4 (four) months, FM of the buying scheme has to provide a detailed justification to the trustees for buying such security.
AMCs are also required to ensure that the Compliance Officer, CIO and FMs of transferor and transferee schemes have satisfied themselves that ISTs undertaken are in compliance with the regulatory requirements.
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