In August 2015, JP Morgan AMC restricted redemptions in two of its debt mutual funds that had excessive exposure to Amtek Auto bonds which was degraded and subsequently defaulted. This forced SEBI to relook redemption restriction in mutual funds. The following was conveyed via a circular dated 31st May 2016:
- Restrictions can only be imposed for 10 days in any 90 day period. If I am not wrong, there was no such limit earlier.
- A restriction will require AMFI and AMC trustees approval with immediate intimation (not permission) to SEBI. Earlier the AMC could handle this 'internally'.
- A redemption amount less than 2 lakh will not be subject to such restrictions.
- For an amount above 2 lakh, the first 2 lakh will still be free of restrictions. This is a good move as no limit was set earlier.
When restrictions on redemptions can be imposed
Restriction on redemption cannot be used as an ordinary tool in order to manage the liquidity of a scheme.
Further, restriction on redemption due to illiquidity of a specific security in the portfolio of a scheme due to a poor investment decision, shall not be allowed
So if an Amtek auto happens all over again, restrictions cannot be imposed. Since then, SEBI has now imposed a 10% exposure limit rule to debt securities too. Therefore concentration risk and the chance of this happening is much lower now.
Restrictions can be imposed when
- the entire market becomes illiquid
- exchange is closed due to an emergency (like political crisis, war, acts of nature )
- force majeure -like blackouts at the exchange or AMC. (eg. Chennai floods)
SEBI has done a very good job of plugging the gaps here.
Link to the original circular: Restriction on redemption in Mutual Funds
Thanks to Mahesh Mirpuri who posted the circular on Twitter.