Sebi issues guidelines for inter-scheme transfers of securities in mutual funds

If a security gets downgraded following Inter-Scheme Transfers (ISTs) within a period of four months, fund manager of the buying scheme has to provide detailed justification to the trustees for purchasing such security, Sebi said in a circular. Presently, ISTs are allowed only if such transfers are done at the prevailing market price for quoted instruments on spot basis and the securities so transferred are in conformity with the investment objective of the scheme to which such transfers have been made.

Sebi on Thursday came out with guidelines for inter-scheme transfer of securities in mutual funds whereby no such transfer will be allowed in case of negative news in the mainstream media about the security. If a security gets downgraded following Inter-Scheme Transfers (ISTs) within a period of four months, fund manager of the buying scheme has to provide detailed justification to the trustees for purchasing such security, Sebi said in a circular.

Presently, ISTs are allowed only if such transfers are done at the prevailing market price for quoted instruments on spot basis and the securities so transferred are in conformity with the investment objective of the scheme to which such transfers have been made. In order to ensure that transfers of securities from one scheme to another scheme in the same mutual fund are in conformity with the investment objective, Sebi has come out with additional safeguards.

In case of close-ended schemes, Sebi said ISTs purchases would be allowed within "three" business days of allotment pursuant to New Fund Offer (NFO) and thereafter, no ISTs will be permitted. With regard to open-ended schemes, ISTs will be allowed for meeting liquidity requirement in a scheme in case of unanticipated redemption pressure and to rebalance the breach of regulatory limit.

"No ISTs 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... (prescribed by Sebi) during the previous four months," it added. Asset Management Companies (AMCs) will have to ensure that compliance officer, chief investment officer and fund managers of transferor and transferee schemes have satisfied themselves that ISTs undertaken are in compliance with the regulatory requirements and documentary evidence in this regard will be maintained by them for all ISTs.

With regard to meeting liquidity, Sebi said AMCs need to have an appropriate liquidity risk management model at scheme level, approved by trustees, to ensure that reasonable liquidity requirements are adequately provided for. Recourse to ISTs for managing liquidity will only be taken after the avenues -- scheme cash & cash equivalent, market borrowing selling of scheme securities in the market -- for raising liquidity have been attempted and exhausted.

About rebalancing the breach of regulatory limit, Sebi said ISTs can be done where any one of duration, issuer, sector and group balancing is required in both the transferor and transferee schemes. Different reasons cannot be cited for transferor and transferee schemes except in case of transferee schemes being credit risk schemes, it said.

In order to guard against possible misuse of ISTs in a credit risk scheme, trustees will ensure to have a mechanism in place to negatively impact the performance incentives of fund managers and chief investment officers, among others, involved in the process of ISTs in the credit risk scheme, in case the security becomes default grade after the ISTs within one year. Such negative impact on performance will mirror the existing mechanism for performance incentives of the AMC, it added.

The guidelines will be applicable from January 1, 2021, the Securities and Exchange Board of India (Sebi) said..

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