InvestorQ : Can you tell me about the implications of the latest SEBI circular on inter-scheme transfers in debt funds and how will it be useful to MF investors?
Niti Shenoi made post

Can you tell me about the implications of the latest SEBI circular on inter-scheme transfers in debt funds and how will it be useful to MF investors?

Answer
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ishika Banerjee answered.
3 weeks ago


The regulator recently passed a circular putting restrictions on the inter scheme transfer of securities in the case of debt funds. Here are the highlights.

· The idea of the circular is to ensure that the use of inter-scheme transfers or ISTs by debt funds is only done where it is justified and necessary.

· Inter scheme transfer or IST is quite common and it entails shifting of debt instruments from one MF scheme to another, which is a regular practice in debt funds.

· Current rules on inter scheme transfer only stipulate that ISTs should be done at market determined prices and in conformity with objects of the scheme.

· However, SEBI has in the recent past observed that several debt funds were opting for IST when redemption pressures mounted on credit risk funds

· The most popular was shifting risk to non-credit risk funds. In fact, the total ISTs stood at Rs.60,300 crore in FY21 with over Rs.20,000 crore happening in April itself.

· The new SEBI circular on ISTs will be effective from Jan-21. According to the circular, IST in the case of closed-ended funds can only be done for 3 days post allotment of units.

· In the case of all IST cases, the fund managers must first use cash, cash equivalents, and market borrowings to meet redemption pressure. Only after that IST must be used.

· Fund manager performance will be linked to the outcome of such ISTs, especially where there is a downgrade of such paper within 4 months.

· No IST to be allowed on risky assets as classified by the fund. This could be controversial but essential to protect the interests of the unit holders.