MFs write to Sebi as govt announces 3-year lock-in period for Yes Bank shares

March 17, 2020 3:32 PM

The Yes Bank stock will go out of the Nifty 50 from March 19 but the lock-in would prevent fund managers from rejigging large cap schemes and exchange traded funds (ETFs), which are aligned to the benchmark index.

yes bank, nifty50The impact of this would be even greater on ETFs, which track the Nifty50, since the Yes Bank shares cannot be replaced with the new entrant.

By Malini Bhupta

Mutual funds have written to the Securities and Exchange Board of India (Sebi) seeking relief from a government directive which states 75% of shares held in Yes Bank would be locked in for a period of three years.
The Yes Bank stock will go out of the Nifty 50 from March 19 but the lock-in would prevent fund managers from rejigging large cap schemes and exchange traded funds (ETFs), which are aligned to the benchmark index. The impact of this would be even greater on ETFs, which track the Nifty50, since the Yes Bank shares cannot be replaced with the new entrant. This would impact returns, too, and create tracking errors.

Mutual funds have approached the regulator to resolve this. The Association of Mutual Funds in India (AMFI) has also written to Sebi on the same. Commenting on the same, AMFI CEO NS Venkatesh told FE: “We have written to Sebi saying this can cause havoc in the markets and ETFs would also have a tracking error.” The performance of ETFs are closely linked to the indices that they track closely. If an ETF cannot follow the index it tracks then that impacts its performance.

The government on notified on Saturday that shares to the extent of 75% held by existing shareholders as on the date of commencement of the said scheme (13 March) shall be locked in for a period of three years. Commenting on the issue, Quantum Mutual Fund said, “Passive funds track the underlying index by investing in index stocks proportionately to index weight ­- in this case Nifty. As NSE Index Committee has announced removal of Yes Bank from index, ideally passive funds have to sell it off but now since 75% stock remains under lock-in for three years, it is not possible for a passive fund to sell.” If there is no change, then ETFs and large cap schemes will have to hold on 75% of their holdings in Yes Bank.

Some mutual funds have also asked the regulator to consider side-pocketing of these shares as in the case of debt schemes. Side-pocketing is an accounting method where funds segregate illiquid investments and existing investors get a pro rata allocation in these assets, too. FE has learned that Sebi is expected to address concerns within a few days.

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