1. Mutual funds can limit redemption in crisis situations

Mutual funds can limit redemption in crisis situations

The Securities and Exchange Board of India (Sebi) has directed that restrictions on redemptions from mutual funds may be imposed when there are circumstances leading to systematic crises that constricts market liquidity, reports fe Bureau in Mumbai.

By: | Mumbai | Published: June 1, 2016 7:38 AM
The market watchdog has banned restrictions on requests to redeem up to Rs 2 lakh, a move aimed at protecting the interests of retail investors. The market watchdog has banned restrictions on requests to redeem up to Rs 2 lakh, a move aimed at protecting the interests of retail investors.

The Securities and Exchange Board of India (Sebi) has directed that restrictions on redemptions from mutual funds may be imposed when there are circumstances leading to systematic crises that constricts market liquidity, reports fe Bureau in Mumbai.

The market watchdog has banned restrictions on requests to redeem up to Rs 2 lakh, a move aimed at protecting the interests of retail investors. Where redemption requests are for amounts above Rs 2 lakh, the first Rs 2 lakh needs to be redeemed, with the remainder being held back. Restrictions on redemption may be imposed for a specified period of time not exceeding 10 working days in any 90-day period, the regulator said.

In August last year, JP Morgan Asset Management Company (AMC) had restricted redemptions to 1% for two of its debt schemes after exposure to debt securities of Amtek Auto turned bad. The AMC had restricted redemption from two of its debt schemes — Short Term Income Fund and India Treasury Fund. The move came in the wake of a decline in net asset values of the schemes due to fund house’s exposure to Amtek Auto’s debt papers.

These schemes had a collective exposure of about Rs 200 crore in Amtek Auto.

The market regulator issued a circular on Tuesday saying restrictions can be imposed on redemptions “when market at large becomes illiquid affecting almost all securities rather than any issuer specific security”. It also clarified that restriction on redemption due to illiquidity of a specific security in the portfolio of a scheme due to a poor investment decision will not be allowed.

Apart from liquidity issues, redemption can be stopped when there are market failures, exchange closures that are affected by unexpected events which impact the functioning of exchanges or the regular course of transactions. “Such unexpected events could also be related to political, economic, military, monetary or other emergencies,” added Sebi. Even operational issues (such as a blackout) can only be considered if they are reasonably unpredictable and occur in spite of appropriate diligence of third parties, adequate and effective disaster recovery procedures and systems.

Any imposition of restriction would require specific approval of the board of the AMCs and trustees and the same should be conveyed to Sebi immediately. The circular is applicable immediately for all schemes to be launched after Tuesday and all the existing schemes with effect from July 1, 2016, it said.

Sources said that the initial round of bids saw participation from a number of financial and strategic players including the Blackstone Group and Irish cement maker CRH Group.

Industry sources said that CEMEX, globally the third largest cement manufacturer, is keen enter the country and is therefore looking at this opportunity as an apt one. It was in talks to acquire a cement plant in Nagpur till recently but the deal did not materialise as the plant in question did not have captive limestone reserves.

If the deal is bagged by China’s Conch Cement, it will mark the entry of a Chinese cement firm in the country. The Nirma Group has also been grappling with regulatory issues for its proposed greenfield cement plant in Gujarat. For Piramal Group also the deal would mark its entry into the cement sector.

Last year, Lafarge was directed by the Competition Commission of India (CCI) to divest a part of its cement assets over antitrust concerns following its global merger with Swiss cement giant Holcim in April 2014. The CCI’s concern stemmed from the fact that Lafarge and Holcim together enjoyed a dominant position in several markets in India with total capacity of 68 million tonnes per annum. While Lafarge has a large presence in eastern India, Holcim through its subsidiaries ACC and Ambuja Cement has a presence in almost all key markets in India.

In August 2015, Lafarge received conditional clearance from CCI to sell its Jojobera and Sonadih plants in eastern India to Birla Corporation for an estimated Rs 5,500 crore. However, the deal did not go through due to regulatory issues pertaining to transfer of limestone mining rights, following which Lafarge submitted a revised proposal to sell its entire cement assets here. The plan again hit a roadblock when Competition Appellate Tribunal halted the sale process in April on an appeal by Dalmia Cement. However, Dalmia subsequently withdrew its appeal, thus clearing all roadblocks in the sale process.

Industry experts maintain that the forthcoming sale could see aggressive bidding given the growing interest in the Indian cement industry, which has a current production capacity of 287 mtpa but is growing at a rate of 8% per annum.

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