In an investor friendly move, the Securities and Exchange Board of India (Sebi) this week directed set of rules on circumstances under which asset management companies can restrict redemption and such moves should be immediately informed to the market regulator.
The move comes in the wake of JP Morgan case, which recently disallowed redemptions in two schemes due to their exposure to the debt papers of a troubled company. The market regulator further said that asset management companies (AMCs) can impose restrictions on redemptions by investors only when there are issues that could lead to a systemic crisis rather than based on entity specific instances.
According to the regulator, redemption requests up to Rs 2 lakh would not be subject to restriction. In case, the amount is more than Rs 2 lakh, then the AMCs would redeem the first Rs 2 lakh without any restriction while the remaining amount would be subject to the restriction that is in place. This norm is seen as a move to protect small investors.
Femoney spoke to Vidya Bala, Head, Mutual Fund Research FundsIndia.com to get a clarity on Sebi’s new rule in 5 points:
– First thing that an investor should know is that under normal circumstances there can be no restrictions on their redemption for open-ended schemes – equity or debt – whatever be the amount. There is a misunderstanding that the new rule is applicable in normal circumstances
– The new regulation is meant to clearly define the exceptional circumstances under which AMCs can impose restrictions. This is not a norm, this is an exception; to ensure AMCs do not arbitrarily impose restrictions as it happened with certain debt fund some funds ago
– The circumstances when such restrictions will be imposed would be due to overall market crisis or illiqiuidity in the market and not due to issues relating to a specific fund house because of certain instruments or securities that it holds.
– Rare circurmstances of overall market closure or operation issues is one more exception when redemption restriction may happen. Even then overall, the restriction annot be for more than 10 working days in a period of 90 days. Hence it is a very temporary sanction, if at all imposed
– The new regulation is aimed at protecting the small investor, even in such exceptional circumstances as the AMC cannot impose restriction on redemptions upto to Rs 2 lakh.