The market regulator is looking at creating "gating" norms to determine how and when mutual funds can restrict investors from withdrawing money from debt schemes. The authority also wants to specify circumstances under which mutual funds can separate bad assets from good assets and hold the former in a segregated scheme, known as a "side pocket".
The aim is to help investors and funds navigate Amtek Auto-like episodes better, where a ratings downgrade of assets can spark off a massive exit by investors. The issue assumes significance as ratings downgrades become common in a challenging economic environment.
| WHAT IS GATING? Gating involves temporary restrictions on redemption or withdrawal of investments. It helps prevent large-scale redemption from the entire scheme and gives fund managers time to exit the illiquid parts of the portfolio. Schemes are typically gated for seven to 10 days AND WHAT IS A SIDE-POCKET? Creating a ‘side pocket’ involves separating the illiquid assets from other more-liquid investments. The side-pocket, thus, becomes a segregated scheme with a different net asset value and with illiquid assets. |
"At present, stopping or limiting of redemptions is at the judgment of the trustees, but Sebi (Securities and Exchange Board of India) wants norms to clearly define this process," said Manoj Nagpal, chief executive, Outlook Asia Capital. A trustee is a person or firm that holds or administers assets for the benefit of a third party.
