Capital market regulator Securities and Exchange Board of India (Sebi) is set to revise its rules to make it mandatory for mutual
funds to list close-ended
schemes — both equity and debt — on stock exchanges.
The proposed changes are aimed at protecting asset management companies and unitholders from the risks arising out of abrupt, heavy withdrawals by large institutional investors and to discourage early or premature withdrawals by investors.
Over a month ago, several fund houses came under severe pressure after institutional investors pulled out funds owing to a liquidity squeeze. Later, the Reserve Bank of India opened a window for banks to access funds for lending to mutual funds to help them tide over the situation.
These events prompted Sebi to undertake a review of the structure of MFs, especially debt schemes, taking into account the systemic risks.
A review of rules relating to MFs’ close-ended schemes is under way and the Sebi board may discuss changes in regulations, a source said. Funds may also not be allowed to repurchase units through the buyback facility window.
According to the proposal, there will not be any exit opportunity for investors through the fund.
Instead, they will have to do so through the exchange. Currently, in a close-ended scheme, a fund offers a window for investors to redeem their units periodically. The changes under way will imply that the fund will no longer have to bear the cost associated with huge redemptions.
An investor who wants to exit can do so through the stock exchange — he, therefore, will have to find a buyer. The onus is no longer on the fund house to provide the window and ensure liquidity.
Effectively, this will mean that funds with a fixed tenure will now truly be close-ended schemes, which could be traded like exchange-traded funds.
This will also address the issue of asset-liability mismatch at some fund houses to a certain extent, besides helping to do away with the exit load that is imposed when unitholders move out.
Globally, close-ended shemes are listed on exchanges, except for those which are close-ended for perpetuity, in which case the fund house provides the interval structure.
Since the trading of units takes place only on the exchange, net asset values (NAVs) will not be impacted. Investors who stay on in the scheme are protected to a great extent and the fund manager is also not forced to sell securities before maturity at a huge discount, as is the case now when large investors in close ended schemes pull out.
However, officials in the mutual fund industry said there will be a listing cost involved. These will be part of the expenses for the fund, but will be lower than the exit load.
Apart from the changes to the rules on mutual funds, the Sebi board, which is meeting on Thursday, is also slated to discuss the future of regional stock exchanges (RSEs). The issue of handling the valuation and distribution of RSEs’ assets may be taken up.
funds to list close-ended
schemes — both equity and debt — on stock exchanges.
The proposed changes are aimed at protecting asset management companies and unitholders from the risks arising out of abrupt, heavy withdrawals by large institutional investors and to discourage early or premature withdrawals by investors.
Over a month ago, several fund houses came under severe pressure after institutional investors pulled out funds owing to a liquidity squeeze. Later, the Reserve Bank of India opened a window for banks to access funds for lending to mutual funds to help them tide over the situation.
These events prompted Sebi to undertake a review of the structure of MFs, especially debt schemes, taking into account the systemic risks.
A review of rules relating to MFs’ close-ended schemes is under way and the Sebi board may discuss changes in regulations, a source said. Funds may also not be allowed to repurchase units through the buyback facility window.
According to the proposal, there will not be any exit opportunity for investors through the fund.
Instead, they will have to do so through the exchange. Currently, in a close-ended scheme, a fund offers a window for investors to redeem their units periodically. The changes under way will imply that the fund will no longer have to bear the cost associated with huge redemptions.
An investor who wants to exit can do so through the stock exchange — he, therefore, will have to find a buyer. The onus is no longer on the fund house to provide the window and ensure liquidity.
Effectively, this will mean that funds with a fixed tenure will now truly be close-ended schemes, which could be traded like exchange-traded funds.
This will also address the issue of asset-liability mismatch at some fund houses to a certain extent, besides helping to do away with the exit load that is imposed when unitholders move out.
Globally, close-ended shemes are listed on exchanges, except for those which are close-ended for perpetuity, in which case the fund house provides the interval structure.
Since the trading of units takes place only on the exchange, net asset values (NAVs) will not be impacted. Investors who stay on in the scheme are protected to a great extent and the fund manager is also not forced to sell securities before maturity at a huge discount, as is the case now when large investors in close ended schemes pull out.
However, officials in the mutual fund industry said there will be a listing cost involved. These will be part of the expenses for the fund, but will be lower than the exit load.
Apart from the changes to the rules on mutual funds, the Sebi board, which is meeting on Thursday, is also slated to discuss the future of regional stock exchanges (RSEs). The issue of handling the valuation and distribution of RSEs’ assets may be taken up.
Source: http://economictimes.indiatimes.com/Personal_Finance/Mutual_Funds/MF_News/Mutual_funds_may_now_have_to_list_close-ended_schemes/articleshow/3786296.cms
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