The mutual fund industry is crying foul after market regulator Securities and Exchange Board Of India laid down the ground rules for restricting redemptions.
Eight months after JPMorgan AMC's redemption crisis, SEBI clarified the conditions under which Mutual Funds can opt to restrict redemptions.
The Conditions
- Liquidity Conditions: SEBI says this will apply to the market as a whole, and not for any issuer specific security. Last September, after Amtek Auto defaulted, JP Morgan AMC imposed restrictions on daily redemption. This action of the AMC caught the attention of the regulator who has been in discussion with market participants over the issue of restrictions on redemptions.
- Market Failures, Exchange Closures: This refers to when market is impacted by unexpected events leading to functioning of the exchanges.
- Operational Issues: When exceptional circumstances are caused by force majeure.
This actually pacifies a lot of small investors. In fact, mutual funds should look at it as a selling point for retail investments to mutual funds.Dhirendra Kumar, Founder & CEO, Value Research
While this may not be to the liking of fund houses that consider this move to be micro management by market regulator, it comes as a big relief for the retail investors. SEBI has clarified norms on restrictions on redemption of mutual funds. As per the new norms, there are no restrictions on redemption of up to Rs 2 lakhs. However, any amount above Rs 2 lakhs is subject to the redemption policy approved by the board of the AMC.
This is a good clarity from SEBI. It will help protect retail investor interest in a fund.Nilesh Shah, MD & CEO, Kotak AMC
Currently, redemption of mutual funds can be restricted by an AMC, but after this diktat, investors can at least partially withdraw their money.
SEBI guidelines now allow restrictions for only up to 10 days in any 90-day period. The capital market regulator has stated that the current provisions are broad guidelines for the industry.
MF Industry Miffed
Mutual Fund industry veterans see this move as another attempt by the regulator to micro manage the industry. SEBI had earlier insisted on public disclosure of fund manager remuneration.
High ranking officials at some of the leading MFs did not want to come on record on this new diktat. Industry sources argue that investments are always subject to risks, and that imposing restrictions on redemption will force fund managers to act in a conservative manner. This they say will in the long run go against the investor who is investing in mutual funds for higher returns. Sources argue that even in the debt market, there are many government securities which are illiquid. But, SEBI has disallowed restriction on redemption as a tool to manage the liquidity of a scheme.
If the JPMorgan redemption crisis were to happen today, the AMC would not have bene allowed to impose any restrictions on redemptions.
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