CAPITAL market regulator Securities and Exchange Board of India (SEBI) is set to revise its rules to make it mandatory for mutual funds to list close-ended schemes — both equity and debt — on stock exchanges. The proposed changes are aimed at protecting asset management companies and unit holders from the risks arising out of abrupt, heavy withdrawals by large institutional investors and to discourage early or premature withdrawals by investors.
Over a month ago, several fund houses came under severe pressure after institutional investors pulled out funds owing to a liquidity squeeze. Later, the Reserve Bank of India opened a window for banks to access funds for lending to mutual funds to help them tide over the situation. These events prompted Sebi to undertake a review of the structure of MFs, especially debt schemes, taking into account the systemic risks.
A review of rules relating to close-ended schemes of mutual funds is under way and the Sebi board is expected to discuss changes to the regulations, a person familiar with the development said. Funds may also not be allowed to repurchase units through the buyback facility window. According to the proposal being considered, there will not be any exit opportunity for investors through the fund. Instead they will have to do so through the exchange. Currently, in a close-ended scheme, the fund offers a window for investors to redeem their units periodically.
The changes under way will imply that the fund will no longer have to bear the cost associated with huge redemption. An investor who wants to exit can do so through the stock exchange — he, therefore, will have to find a buyer. The onus is no longer on the fund house to provide the window and ensure liquidity.
Effectively, this will mean that funds with a fixed tenure will now truly be close-ended schemes, which could be traded like an exchange-traded fund. This will also address the issue of asset-liability mismatch at some fund houses to a certain extent, besides helping to do away with the exit load that is imposed when unit holders move out.
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All close-ended schemes—both debt and equity—may have to be listed
Close-ended schemes will be freely traded, akin to an exchange-traded fund
RBI’s cumulative liquidity support to MFs & NBFCs stood at Rs 4,300 crore
MFs’ AUM as on stands at Rs 4.2 lakh crore
FMPs fell from Rs 73,602 crore to Rs 49,246 crore, an erosion of close to Rs 24,000 crore
Over a month ago, several fund houses came under severe pressure after institutional investors pulled out funds owing to a liquidity squeeze. Later, the Reserve Bank of India opened a window for banks to access funds for lending to mutual funds to help them tide over the situation. These events prompted Sebi to undertake a review of the structure of MFs, especially debt schemes, taking into account the systemic risks.
A review of rules relating to close-ended schemes of mutual funds is under way and the Sebi board is expected to discuss changes to the regulations, a person familiar with the development said. Funds may also not be allowed to repurchase units through the buyback facility window. According to the proposal being considered, there will not be any exit opportunity for investors through the fund. Instead they will have to do so through the exchange. Currently, in a close-ended scheme, the fund offers a window for investors to redeem their units periodically.
The changes under way will imply that the fund will no longer have to bear the cost associated with huge redemption. An investor who wants to exit can do so through the stock exchange — he, therefore, will have to find a buyer. The onus is no longer on the fund house to provide the window and ensure liquidity.
Effectively, this will mean that funds with a fixed tenure will now truly be close-ended schemes, which could be traded like an exchange-traded fund. This will also address the issue of asset-liability mismatch at some fund houses to a certain extent, besides helping to do away with the exit load that is imposed when unit holders move out.
BOURSE COURSE
All close-ended schemes—both debt and equity—may have to be listed
Close-ended schemes will be freely traded, akin to an exchange-traded fund
RBI’s cumulative liquidity support to MFs & NBFCs stood at Rs 4,300 crore
MFs’ AUM as on stands at Rs 4.2 lakh crore
FMPs fell from Rs 73,602 crore to Rs 49,246 crore, an erosion of close to Rs 24,000 crore
