SEBI directs MFs to ring-fence assets, liabilities of each scheme

Our Bureau Mumbai | Updated on December 16, 2020

MFs cannot use unit-holder’s money or assets to pay their liabilities and show losses

In the wake of the recent fiasco at a large mutual fund, market regulator SEBI has now ordered all MFs to ‘ring-fence’ the assets and liabilities of each scheme. This is in addition to the existing requirement of segregating bank and securities accounts of the MFs, the regulator has said.

Ring-fencing will mean that MFs cannot use unit-holder’s money or assets to pay their liabilities and adjust it as losses in the respective schemes, experts said. Currently, money collected from investors for various schemes is combined as are the liabilities. “All assets and liabilities of each scheme shall be segregated and ring-fenced from other schemes of the MF,” SEBI said.

Experts were expecting SEBI to announce measures on restricting MFs from unilaterally announcing winding down of schemes, as done by Franklin. The Supreme Court has directed Franklin to get shareholders to vote on winding down six debt schemes and liquidate their assets; Franklin has discontinued redemptions in these schemes. “It was expected that SEBI would announce a penalty structure for MFs, especially in the wake of recent issues. Nevertheless, an announcement on this is still likely in near future,” said Sonam Chandwani, Managing Partner, KS Legal and Associates.

“SEBI has taken investor-friendly measures that will make MFs attractive. Rightly so, it has not gone into micromanagement. But nothing that SEBI does ever will be enough,” said J N Gupta, former ED of SEBI.

SEBI also declared that profitability criteria is not necessary for sponsoring an MF if any entity has ₹100 crore net worth ‘at the time of application.’ According to Chandwani, earlier the sponsors were required to have a five-year record in the financial services business and profit in at least three of the five years.

Published on December 16, 2020

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