Securities and Exchange Board of India vide it circular dated 31st May, 2016 eased the redemption norms for mutual fund investors by allowing them to redeem their investment partially even if the asset management company imposes restriction on redemption.
As per the earlier circular, Board of Directors of the Asset Management Company (AMC) and the Trustees could impose restriction on redemption under any scheme of the mutual fund. Due to the general nature of provisions in the earlier circular giving discretionary powers to AMC's and in light of recent incidents of companies imposing unreasonable restrictions, SEBI recognised the need to have a re-look at the circumstance under which such restriction on redemption could be imposed.
GENERAL MARKET LIQUIDITY
The circular states that circumstances calling for restriction on redemption should be such that illiquidity is caused in almost all securities affecting the market at large, rather than in any issuer specific securities. Therefore, restrictions can be imposed in case of systematic crisis or events that severely constrict market liquidity or the efficient functioning of market.
- AMC's cannot use restriction as a tool for managing liquidity in schemes and must have proper internal liquidity management tools in place. If a fund takes a poor investment decision and is not able to sell a specific security in the portfolio of a scheme that leads to a liquidity issue, it cannot restrict withdrawals.
- If the market is hit by unexpected events related to political, economic, military, monetary or other emergencies, which impact the functioning of exchanges or the regular course of transactions, AMCs can impose restriction or limits on redemptions.
- Restriction in case of exceptional circumstances caused by force majeure, unpredictable operational problems and technical failures can only be considered if they are reasonably unpredictable and occur in spite of appropriate diligence.
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