Following IL&FS crisis, SEBI has relaxed norms for mutual funds to deal with stressed assets.
In a circular issued today, SEBI has allowed fund houses to create segregated portfolios in debt funds in case of credit events to deal with the liquidity risk. However, SEBI has kept it optional for fund houses.
Side-pocketing is a practice in which fund houses can segregate risky assets from the rest of their holdings and cap redemptions. Simply put, fund houses can create two funds - one with risky assets where fund house will not allow redemption expecting recovery from stressed assets and another fund with other assets with existing features.
Here are the key highlights:
- Fund houses can segregate stressed assets by creating two portfolios – segregated portfolio having stressed assets and main portfolio with rest of securities.
- Fund houses can segregate portfolio only in case of credit event at issuer level i.e. downgrade in credit rating to ‘below investment grade’ or lower by a SEBI registered credit rating agency.
- AMCs will have to seek trustees approval before creating segregated portfolio
- AMCs will have to immediately issue a press release disclosing its intention to segregate and its impact on investors. Also, fund houses will have inform unitholders through email and SMS.
- AMCs can suspend subscription and redemption for 1 business day for processing
- NAV will be calculated from the day of credit event
- AMCs cannot allow fresh subscription and redemption on segregated portfolio. However, they will have to list it on stock exchange to provide exit option to investors within 10 working days of creation of such portfolio
- Fund houses cannot charge investment and advisory fees on segregated portfolio. However, TER on R&T charges and other expenses can be charged on a pro-rate basis. In addition, fund houses can charge legal charged related to recovery of investments
- The cost related to segregated portfolio cannot be charged from the main portfolio
- AMCs will have to put in sincere efforts to recover the investments of the segregated portfolio
- Upon recovery of money, whether partial or full, AMCs should immediately distribute it among investors in proportion to their holding in the segregated portfolio.
- To check misuse of segregated portfolio, AMC trustees will have to ensure that the fund house puts a mechanism in place to create and manage segregated portfolio.
