SEBI Circular on Restriction of redemption in Mutual Funds

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:

  1. Restrictions can only be imposed for 10 days in any 90 day period. If I am not wrong, there was no such limit earlier.
  2. A restriction will require AMFI and AMC trustees approval with immediate intimation (not permission) to SEBI. Earlier the AMC could handle this 'internally'. 
  3. A redemption amount less than 2 lakh will not be subject to such restrictions.
  4. 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.

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7 thoughts on “SEBI Circular on Restriction of redemption in Mutual Funds

  1. Ramesh Kulkarni

    This is really nice that SEBI is keenly protecting the interests of retail investors.
    Here, I wish, at least a few of our 'wishes' ( http://freefincal.com/personal-finance-wishlist-2016/ ) are addressed by SEBI in some near future...

    Say, for example:
    3. Banks should enable buying only 'direct' products (mfs, insurance etc.)
    5. Closed-ended funds should be banned.
    6. ELSS dividends should not be declared in the last two quarters of the year.
    7 One-time KYC the moment a guy becomes employed
    9 Tax rules should depend on the underlying asset class and not the product
    11 Tax slabs to be linked to inflation and small saving scheme interest rates linked to GOI bond prices

    Is there any mechanism that these points are conveyed to SEBI, Govt. of India, Finance Ministry or RBI?

    Am I getting into a day-dreaming mode? 🙂

    Reply
  2. Renga

    Sorry I think I don't understand this new development, say my current market value in a MF is 10Lakhs and I want to redeem all of them on a given day for a goal or an emergency - are we saying this is no more allowed?

    Reply
    1. freefincal

      Of course you can redeem! Restrictions apply only for the extreme conditions mentioned above.

      Reply
  3. Haresh Nagpal

    Really Bad move as AMC will sell the assets at distressed rates without waiting .Am I missing something ?

    Reply
    1. freefincal

      So, you don't mind being told by the AMC that you cannot redeem your money because the call we made went wrong?!!

      Reply

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