Answering a query on the muted response to side pocketing, SEBI Chairman Ajay Tyagi said at a press conference in Mumbai that the market regulator cannot force fund houses to opt for side pocketing.
He said, “Side pocketing guidelines were released in December. Those guidelines are there. They are not mandatory. Mutual funds know how to do it. They do not need any guidance on how to do it.”
Post IL&FS crisis, SEBI had issued a circular on ‘creation of segregated portfolio in mutual fund schemes’ popularly known as side-pocketing on December 28, 2018. 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 the fund house will not allow redemption expecting recovery from stressed assets and another fund with other assets with existing features. This practice is quite common among hedge funds in developed markets.
SEBI has kept it optional for fund houses. So far only one AMC has opted for a segregated portfolio through side-pocketing despite a series of credit events.
Debt Guru Joydeep Sen has pointed out that most AMCs fear that if they create a segregated portfolio, it could create panic among their investors. He said, “The apprehension that when sentiments are disturbed, a communication from AMCs on creating a segregated portfolio for stressed assets may send the wrong signals. The unit-holders may ask what is it in your portfolio that may go wrong. Don’t you have confidence in your portfolio that you want to a separate portfolio? Since side-pocketing would be a change in fundamental attribute, fund houses will have to give one month no load window to unit-holders giving them an option to exit, which may potentially shift business to competition.”
“Also, there will be a first mover disadvantage i.e. if nobody else is doing it, why should we. AMCs may not be keen to take the first step,” he added.
