The capital markets regulator has rejected a mutual fund industry proposal to allow them to isolate risky assets from the rest of their holdings and cap redemption, saying that it will encourage fund managers to take unnecessary risks, three people directly familiar with the developments said.
The Association of Mutual Funds of India (Amfi) in March approached the Securities and Exchange Board of India (Sebi) to set rules for the creation of a so-called side pocket when a specific investment faces a credit risk as a way to insulate the broader portfolio from redemption pressure.
JP Morgan Asset Management (India) Pvt. Ltd pursued this approach last year even though there were no clear regulations in place. The asset manager restricted redemptions as investors demanded their money back after the net asset values of two of its schemes plunged following the downgrade of the credit rating of Amtek Auto Ltd’s bonds.
JP Morgan had a Rs.193 crore exposure to Amtek Auto.
This prompted the mutual fund lobby body to approach the regulator for a set of regulations that would help standardize the practice.
The regulator, however, is not in favour of establishing it as the norm.
“Sebi is of the view that mandating the creation of a side pocket, to minimize the redemption pressure on the entire fund arising from their exposure to any particular company, could lead to some fund managers taking unnecessary risks,” said the chief executive officer of a large fund house, requesting anonymity.
An email to Sebi on Thursday remained unanswered.
