Sibi Tightens Rule of “Negative Violations” by MFs, Effective July 1

 

 

The Securities and Exchange Board of India (SEBI) has tightened the rules around correction and reporting of “negative abuses” by Mutual Fund (MF) schemes. A negative breach is when a system asset allocation inadvertently deviates from what is stated in the Schema Information Document (SID). This can happen due to large-scale redemptions or a sharp drop in the price of a security where the system has significant exposure.

 

In a prospectus, Sebi said that all microfinance schemes, other than index funds and exchange-traded funds, will be given 30 days to correct any negative violations. If he fails to do so, the fund’s management team will have to provide a written justification, including details of efforts to rebalance the portfolio, to the Investment Committee (IC). The ICRC can then extend the schedule up to 60 days.

If the fund fund fails to meet even the extended deadline, it will be prevented from launching any new scheme until such time as the portfolio is rebalanced. Further, the exit burden, if any, will not be allowed to be imposed on the investors who exit from these schemes.

 

The regulator has also increased requirements for disclosure of negative breaches. Under the new rules, the trust house is required to report any deviation to the trustee at each stage. Also, inform investors immediately if the skewed portfolio is more than 10 percent of the scheme’s pool.

 

The new rules will come into effect from July 1, 2022.

 

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