The Securities and Exchange Board of India, or Sebi, on Thursday said investors will not be allowed to exit close-ended mutual fund schemes before they mature and asked fund houses to list them on stock exchanges.
The market regulator also said all such funds must invest in instruments in line with their maturity profile. The latest norms are applicable for new mutual fund schemes only.
"For all close-ended schemes, no early exits will be provided by the funds," Sebi Chairman CB Bhave told reporters after a board meeting earlier in the day.
The decision follows the liquidity crisis the industry faced two months ago with investors pulling out from fixed income funds fearing their credit quality. More than Rs 9,000 crore (Rs 90 billion) flowed out of debt funds during the period, forcing the Reserve Bank of India to offer money through a special market operation to ease the pressure.
The schemes that have been approved earlier but not launched yet will have to be amended accordingly. More than 100 applications for floating fixed maturity plans (FMPs) are pending with the regulator. Further, several more have been granted approval but are yet to come to market.
The Sebi chief said a host of other issues on mutual funds have been raised. One such issue is segregating the schemes for companies and individuals. "There are also issues about if a scheme is called a liquid scheme then what kind of underlying assets should it have. This is because liquid schemes by nature mean that you can have an easy entry and exit. So there are lots of issues that are being discussed," he said.
Sebi has requested the mutual fund industry body, Association of Mutual Funds of India (AMFI), to prepare an industry paper on this. "The issues that are raised in that paper plus those that have come to our notice -- all of these will go to the mutual fund advisory committee and then it will be put in the public domain," added Bhave.
AMFI Chairman AP Kurian said such a crisis is now unlikely to repeat itself as funds will not be forced to sell under redemption pressures. "If the scheme itself provides a window then it creates discrimination between the outgoing and existing investors. That distortion will be removed," Kurian said.
The Sebi board also extended the validity period of initial public offers and rights issues to one year from three months now. However, companies must file updated documents with Sebi when there are material changes. Currently, companies file the prospectus with Sebi when they want to raise funds through an initial public offer (IPO) or rights issue. Sebi issues observations in 21 days and these observations are valid for three months.
Once the three-month period is over, companies have to re-file the prospectus. This will pave the way for several IPOs such as UTI asset management company, Reliance Infratel, Multi-Commodity Exchange (MCX) and others that had been vetted by Sebi but had not been launched because of poor equity markets.
The board has also decided to extend the electronic rights entitlements and application supported by blocked amount (ASBA) to the rights issue process. ASBA has been tried on a pilot basis in the IPO process. Sebi has enabled electronic rights entitlement, which can be traded electronically in stock exchanges.
Currently, a shareholder who intends to renounce his rights entitlements fills up part B of a rights issue application form. The renouncee can trade this form or apply in the rights issue by filling up part C of the form. Renunciation forms are traded in the physical segment in Bombay Stock Exchange.
The rights entitlement will now be made available in demat form for all shareholders holding the underlying shares in demat form.
With regard to the IPO scam, the Sebi chief said that the regulator was trying to conclude this process by seeing whether the disbursement amount can be collected from the various entities which had been found to have committed irregularities in the market by Sebi.
"We have no decision as yet on when we will actually be disbursing those amount but they have been collected in order to be able to compensate investors. So the issue will be identification of the investors and that amount should be sufficient to be distributed. One cannot just take a small amount and then try to distribute it over thousands of investors. We will have to take a judgement on that," Bhave said.
The board has also decided to adopt a code to avoid conflict of interest for board members. Infosys Technologies director-human resources and head-admin, education and research, T Mohandas Pai and Reserve Bank of India (RBI) deputy governor V Leeladhar attended Thursday's board meeting, informed Bhave.
In a move to improve transparency, Sebi will also put up on the website the agenda papers submitted to the board of all policy issues, after the board has taken a decision on the issue. The minutes of the meeting on such items will also be available on the Sebi website once the board has approved them.