The Securities and Exchange Board of India (SEBI) has issued a circular which seeks to provide strict norms relating to the inter-scheme transfers.
The market regulator stated that inter-scheme transfers can only be performed after other avenues of raising liquidity are attempted and exhausted by a fund house. These include the efficient use of cash and cash equivalent assets that are available in the schemes and selling of scheme assets in the markets.
It is the fund manager’s choice to use market borrowing before considering inter-scheme transfers or vice-versa. The fund manager would have to make a call to know the interests of unitholders. Also, the option of market borrowing or selling of security may be used in any combination and not necessarily in the given order. In case the option of market borrowing and/or selling of the security is not used and the reason for that shall be recorded with evidence. The regulator also wants fund houses to place a liquidity risk management model for every scheme to confirm that reasonable liquidity requirements are adequately provided. Industry sources propose that move which focuses on preventing fund houses from frequently using inter-scheme transfers for generating liquidity. A fund manager stated by requesting anonymity that fund houses need to ensure there is enough liquidity in their schemes so that inter-scheme transfers can be avoided.
Misuse that must be avoided
SEBI has also established guidelines to avoid misuse of inter-scheme transfers.
No inter-scheme transfer of a security is permitted if there is any negative news or rumors spread in the mainstream media or an alert is generated about the security, based on internal credit risk assessment.
If the security gets lowered within four months, following such a transfer, the fund manager of the buying scheme needs to provide detailed justification to the trustees for buying such security.
To protect against possible misuse of inter-scheme transfers in credit risk schemes, trustees shall ensure that there are negative consequences that occurred on the performance motive of fund managers and chief investment officers, granting the security becomes default grade within a year of such a transfer.
Inter-scheme transfers can be done to correct breaches of regulatory limits of group exposure, sector, issuer exposure, or overall duration of the portfolio. Although, different reasons cannot be cited for transferor and transferee schemes except in the case of the transferee scheme being a credit risk scheme.
