Norms for restriction on redemption by Mutual Funds

Restriction on redemption in Mutual Funds eased. Extant provisions on restriction of redemption were general in nature and did not specifically spell out the circumstances in which restriction on redemption may be applied, leading to discretionary disclosures and practices in the industry. Therefore, in order to bring more clarity and to protect the interests of the investors, SEBI vide its circular dated May 31, 2016, prescribed that the following should be observed before imposing restrictions on redemptions: a. Restrictions may be imposed when there are circumstances leading to a systemic crisis or event that severely constricts market liquidity or the efficient functioning of markets such as: i. Liquidity Issues - when the market at large becomes illiquid, affecting almost all securities rather than any issuer specific security. Further, restrictions on redemption is not allowed in instances where a specific security becomes illiquid in the portfolio of scheme due to a poor investment decision. ii. Market Failures, Exchange Closures - when markets are affected by unexpected events that impact the functioning of exchanges or the regular course of transactions. iii. Operational Issues - when exceptional circumstances are caused by force majeure, unpredictable operational problems and technical failures (for example, a black out). b. Restrictions on redemption can be imposed for a specified period of time, not exceeding 10 working days in any 90-day period. c. Any imposition of restrictions will require specific approval of the boards of asset management companies (AMCs) and trustees and SEBI should be informed about this immediately. d. When restrictions on redemption are imposed, the following procedure shall be applied: i. All redemption requests up to INR 2 lakh shall not be subject to such restrictions. ii. Where redemption requests are above Rs. 2 lakh, AMCs shall redeem the first Rs. 2 lakh without such restrictions and the remaining part over and above Rs. 2 lakh shall be subject to such restrictions. For further details, please see the SEBI circular SEBI/HO/IMD/DF2/CIR/P/2016/57 dated May 31, 2016.

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