SEBI Announces Key Changes to Mutual Fund Regulations

In its 28th December board meet, SEBI also announced some major changes to regulate mutual funds more effectively and put greater onus on the funds to deliver to investors with greater transparency and better disclosure practices. This big change in mutual fund regulations was brought out by the Franklin Templeton case of April 2020.
 

What exactly was the Franklin Templeton case?

In April 2020, Franklin Templeton, then among the 10 largest funds in India by AUM, summarily announced the suspension of 6 of its debt funds. These debt funds had a combined AUM of around Rs.25,000 crore. The statement from the fund was that due to illiquidity in the bond markets, the suspension was ordered to protect the interests of the investors and prevent a redemption run on the fund.

However, this also left thousands of unitholders in the lurch. Their funds were stuck with Templeton with little visibility on when the money would come back. Over next 20 months, the principal amount was paid back after the court appointed SBI MF to act as administrator for the 6 funds.

However, it exposed a flaw in regulation. Mutual Fund regulations required the AMC to seek permission of unitholders to shut funds but in extreme cases allowed funds to wind up in the interest of unitholders. It is this loophole that SEBI has sought to plug.
 

What did SEBI announce for similar cases?

In its latest amendment, SEBI has removed the discretion given to funds to suspend redemptions arbitrarily. Going ahead, SEBI has stipulated that if the need for winding up arose, then the onus would fall on trustees to ensure that unitholder approval was sought.

Once the Trustees seek the vote, the outcome of the vote must be disclosed within 45 days. Also, in such cases, the fund can suspend redemptions and summarily close the fund only if 75% of the unit holders vote in favour. In this case, one unit would be one vote, so the vote would be still skewed in favour of the large unitholders. In case, the vote is less than 75%, then from the very next day, the fund will have to offer NAV based pricing on the said fund. 

More changes relevant to mutual fund regulation

SEBI has stipulated that effective from financial year FY23-24, all the Indian mutual funds will have to follow Indian Account Standards (IND AS). This will ensure standardization of the valuation of portfolios, disclosures and also provisions made by mutual funds.

In a related move, SEBI has also stipulated that special situations funds would be allowed under the AIF category to invest only in stressed assets. In addition, the KYC Registration Agency (KRA) will also be responsible for validation of records submitted by the intermediaries. This should allow better quality of KYC registrations.