Now on, investors in new close-ended mutual fund schemes can pull out their money only after the schemes mature. The Securities & Exchange Board of India (Sebi) announced this decision on Thursday along with a string of measures to revive the capital markets, including one-year validity for an IPO nod.
The no-exit clause will avert a repeat of the huge redemption pressure that brought most close-ended mutual funds to their knees in October this year. The regulator also instructed mutual funds to get new offers of close-ended schemes listed in the stock markets. Close-ended schemes by definition can only have a limited number of shares unlike open ended schemes. Listing on the stock market will therefore allow investors to buy these shares from the secondary market if they missed the subscription offer.
Sebi chairman CB Bhave said, ?No early exit will be allowed in any closed ended mutual fund schemes. The schemes which have been approved earlier but not yet launched will also have to be amended accordingly?, he said. However, in reply to a question, Bhave said the new norm will not be applicable to the existing closed ended schemes.
Most industry players, including AP Kurian, chairman of the Association of Mutual Funds of India, have welcomed the move. In September and October, as finance dried up in Indian markets following the global meltdown, the mutual fund industry saw net outflows of Rs 90,000 crore, about a fifth of its total asset under management. The industry had to ask banks for funds. As reported by FE, Bhave said that to correct the asset-liability mismatch, ?The Sebi board has also decided that for close-ended schemes, the underlying assets will not have a maturity beyond the date on which the schemes expires.? Several funds had borrowed in the short-term market and lent long-term, pressuring the liquidity position of the funds further.
The new norms will comfort unitholders with long-term investment plans. ?When redemptions happen in closed ended funds, especially at the pace at which they happened in the past two months, fund managers have to rework their investment strategies and dispose of valuable assets. This would be at the cost of the long-term investor,? said a fund manager.
Now, those who want to exit the fund before its redemption date can only go out by selling their shares in the exchanges. This will not impact the total investment or asset under management of the scheme. But as the pricing of close-ended schemes is a combination of the investment corpus and the pricing in the exchanges, a high rate of selling will affect the liquidity of these units on the exchanges.
On the capital markets front, the regulator has made it possible for companies to keep alive the permission from Sebi to float a public offer for one year from the date of approval. This will help a large number of companies that have deferred their issues after the markets started dipping in July this year. Sebi also introduced electronic rights entitlements and application supported blocked amount (Asba) in the rights issue.
After the board meeting, Bhave said that the IPO issuer has to file an application with updated documents wherever there are material changes. All companies that could not come out with their IPOs can avail of this facility. ?This decision has been taken keeping the present market conditions?, he said.
Sebi has approved electronic rights entitlement, which can be traded in stock exchanges, for rights issues. It has also introduced alternate mode of making applications?Asba–in rights issues. Asba was allowed only in IPOs. ?The issuer can get access to rights issue proceeds only after the allotment is finalised?, Bhave explained.
Bhave said Sebi will adopt a code of conduct to avoid conflict of interest by its board members. The code will be put up on its Web site before December 12, he said.
Sebi has also taken other measures to improve transparency in the working of the board. Now on, agenda papers submitted to the board on all policy issues will be made available in the public domain by putting them up on the Sebi Web site. ?The minutes of the meeting relating to such items will also be made available on the Sebi Web site after the board has approved the minutes?, he said.
Bhave reiterated that the regulator?s focus is on debt schemes as there is no problem with the equity schemes. Debt issuers need to clarify which schemes are meant for the corporates and the retail investors. ?Amfi has been asked to prepare a paper in this regard?, he said. The regulator is looking into the matters of easing restrictions on FIIs and defining liquid assets of liquid funds. These things, Bhave said, would be addressed later.