SEBI has tightened the norms for executing inter scheme transfers. From January 2021, no inter scheme transfers (ISTs) of a security shall be allowed, if there is negative news or rumors in the mainstream media or an alert is generated about the security based on internal credit risk assessment during the previous four months.
Further, if the security is downgraded following ISTs, within a period of 4 months, fund managers of buying schemes have to provide detailed justification and rationale to the trustees for buying such security.
Trustees of fund houses will have to approve an appropriate Liquidity Risk Management (LRM) model at scheme level. The LRM model should ensure that “reasonable liquidity requirements” are adequately provided for every scheme.
SEBI said that fund houses should look to execute ISTs for managing liquidity only after they exhaust the following avenues to raise liquidity:
- Use of scheme cash & cash equivalent
- Use of market borrowing
- Selling of scheme securities in the market
- After attempting all the above, if there is still a scheme level liquidity deficit, then out of the remaining securities, ISTs should be done with the optimal mix of low duration papers with highest quality
However, the market regulator has provided some relaxation in these avenues to raise liquidity. SEBI has said that the option of market borrowing or selling of security may be used in any combination and not necessarily in the above order.
“In case, the option of market borrowing and/or selling of security is not used, the reason for the same shall be recorded with evidence,” SEBI said.
Apart from meeting liquidity requirement in a scheme in case of unanticipated redemption pressure, fund houses can also use ISTs for duration or issuer or sector or group rebalancing.
Now, ISTs can be done where any one of duration, issuer, sector and group balancing is required in both the transferor and transferee schemes. Moreover, different reasons cannot be cited for transferor and transferee schemes except in case of transferee schemes being a credit risk scheme.
In order to guard against possible mis-use of ISTs in credit risk schemes, trustees have to put in place a mechanism to negatively impact the performance incentives of fund managers, chief investment officers (CIOs) involved in the process of ISTs in credit risk schemes in case the security becomes default grade after the ISTs within a period of one year.
Close ended schemes
Further, in case of close ended schemes, IST purchases would be allowed within 3 business days of NFO. Thereafter, no ISTs can be done to or from close-ended schemes.
Impact
Fund managers said that such guidelines on IST clearly suggests that SEBI wants to discourage the practice.
Avnish Jain, Head- Fixed Income, Canara Robeco MF said that with these guidelines, ISTs have become a cumbersome process and it will take a lot more time than what it used to be earlier. Therefore, fund managers will prefer that they explore other avenues as much as possible and use ISTs very rarely.
Moreover, Avnish feels that fund managers will have to now increase their exposure to liquid assets such as gilts, T-bills and so on.
Another fund manager said on the condition of anonymity that using avenues such as borrowing from the market is never an attractive option and will impact the NAV of the scheme badly. Therefore, now the fund managers will have to go back to the drawing board and ensure high exposure to liquid assets even at the cost of generating suboptimal returns.
All these guidelines will be applicable from January 1, 2021.
