InvestorQ : Can you tell me about the steps taken by SEBI during the weak towards regulating inter scheme transfers by mutual funds? What is the purpose of this regulation?
Anu Biswas made post

Can you tell me about the steps taken by SEBI during the weak towards regulating inter scheme transfers by mutual funds? What is the purpose of this regulation?

Answer
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Ria Jain answered.
1 week ago


Mutual funds being retail investment products, SEBI is continuously trying to make it safer and sounder for investors. In another significant move to make investing safer for MF investors, SEBI put some curbs on inter scheme transfers or IST of debt funds.

To understand the reason for this move, you must understand that in the aftermath of the Templeton fiasco when schemes worth Rs.26,000 crore were suddenly closed down, there had been a spate of inter scheme transfers, which SEBI suspects were not above board.

As per data put out by SEBI, in the current financial year 2020-21, debt funds did inter-scheme transfers (IST) of Rs.62,000 crore of which ISTs to the worth of nearly Rs.22,000 crore were done immediately after Templeton MF fiasco. That sounds shady.

Existing rules are quite loose. For example, the only condition for ISTs today is that it should be done at market driven prices. However, the reason or logic or the intent behind the transfer was neither questioned nor it had to be justified.

The new regulations are intended to ensure that fund managers don’t transfer bad assets into the portfolio of some unsuspecting debt fund investor. That is why SEBI has now come out and defined a clear waterfall of how debt funds should meet a liquidity crisis.

Under the modified rules, debt funds must first use their own funds followed by their short term investments and followed by borrowing up to the limits of 10% permitted. Only after that, the ISTs can justify the need to do any inter-scheme transfers.

Additionally, SEBI has now made it mandatory that evaluation and compensation of fund managers must be linked to the outcome of any IST. Funds will have to explain to investors if any IST is followed by a default by the issuer company. This should be good enough.