Recently on 8^th October 2020, SEBI (Security Exchange Board of India) revised the circular for Inter-Scheme Transfers in Mutual Fund. The newly revised circular seeks to tighten the norms relating to inter-scheme transfers.

As per the newly revised circular, “inter-scheme transfers will be processed after other avenues of raising liquidity are attempted and exhausted by a fund house”. These avenues include the 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 January 1, 2021.

It will be the fund managers concern whether he uses market borrowing before considering inter-scheme transfers or vice-versa, although fund managers to reach a decision, have to keep in mind the interest of unitholders.

Further, the revised circular of SEBI, states that the option of market borrowing or selling security can be used in any combination, and if the option of market borrowing and/or selling of the security is not used in any case, the concerned reason must be recorded with evidence.

SEBI has directed the fund houses to put a model in place for liquidity risk management for every scheme. This was done to ensure that investment is provided with reasonable liquidity requirements. Industry sources say that this move taken by SEBI will prevent fund houses from doing frequent inter-scheme transfers to generate liquidity. Now it is a must for fund houses to announce whether there is enough liquidity in their schemes or not.

GUIDELINES TO PREVENT MISUSE OF NEW NORM

In order to prevent the misuse of the new norm for inter-scheme transfer, SEBI has come up with a complete guideline, that includes the following points:

1. No inter-scheme transfer shall be allowed if there is negative news or rumors in the mainstream media or an alert is generated regarding the scheme, based on internal credit risk assessment.

2. If the scheme gets downgraded within a period of four months following such a transfer, the fund manager will be liable for the justification to the trustees for buying such security.

3. To guard against possible misuse 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 transfer helps to correct breaches of regulatory limits pertaining to group exposure, sector, issuer exposure, or overall duration of the portfolio.

For any kind of query, you can contact us at Shri Ashutosh Securities Pvt Ltd., we are here to help you in any way possible.

Happy Investing!

(Mutual Fund investments are subject to market risk Illustrations are for example only, there is no guarantee of returns. Past performance is not an indicator/guarantee of future returns).