SEBI tightens the norms relating to inter-scheme transfers of Mutual Funds

In continuation of the ongoing exercise of streamlining and structural reforms of debt funds, on Thursday (October 8, 2020) SEBI has issued a circular that seeks to tighten the norms relating to inter-scheme transfers. Inter scheme transfers (ISTs) involve shifting of debt papers from one mutual fund scheme to another scheme. As per existing rules of SEBI, the ISTs be done at market prices and such transfers should be in conformity with the investment objective of the receiving scheme.

The new rule is effective from 1 Jan 2021. Under the advocates of the new rule, the ISTs in close-ended funds can only be done within 3 business days of the allotment of the scheme’s units to investors and not thereafter. In the case of open-ended funds inter scheme transfers will be allowed to meet unanticipated redemptions or to rectify breaches of regulatory limits, but only under certain conditions. When the fund is doing ISTs to meet redemption pressure, the fund manager must first use the cash and cash equivalents in the scheme and selling of scheme assets in the markets. Thereafter he has the option to use market borrowings or sell securities. It is only if the above avenues are not sufficient that the fund manager can resort to ISTs.The inter-scheme transfers can only be done after other avenues of raising liquidity are attempted and exhausted by a fund house. “No inter-scheme transfer 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,” the regulator said. Further, if the security gets downgraded within a period of four months following such an IST, the fund manager of the buying scheme will have to furnish a detailed explanation of why the IST was done, it added.

Although Inter-scheme transfers are allowed to correct breaches of regulatory limits pertaining to group exposure, sector, issuer exposure, or overall duration of the portfolio, different reasons cannot be cited for transferor and transferee schemes except in case of transferee scheme being a credit risk scheme,” the market regulator said. The fund manager would have to take a call either to use market borrowing before considering inter-scheme transfers or vice-versa, keeping in mind the interests of unitholders. In case the option of market borrowing and/or selling of the security is not used, the reason for the same shall be recorded with evidence,” it said. Further, AMCs would have to manage liquidity at the scheme level rather than fund house level because now ISTs are more difficult. It means AMCs required holding more cash.