The curiously persistent rise in inter-scheme transfers of debt securities

Asset managers are transferring debt securities between schemes, at a greater rate than any other time since at least 2010-11. The value of such transactions has risen for the fifth year in a row in FY18 and currently stands at Rs.1.67 trillion.

Business Standard also looked at the data as a percentage of mutual funds’ debt assets. This is the highest since 2010-11. The value of transfers accounted for 14.99% of the average fixed income assets, shows data from mutual fund tracker Morningstar India. This is the highest in seven years. Debt funds usually sell securities in the open market. Inter-scheme transfers are an alternative route. They allow for moving debt securities between schemes within the same fund. The regulator generally frowns on the practice. It allows fund houses some discretion in the way they value such papers. Such transfers during the financial crises led to illiquid paper ending up in schemes which hadn't invested in them. The regulator subsequently asked for data on such transfers to be disclosed daily. This data is available since 2009-10. The year 2010-11 is the first period with data for the whole year. The previous year (2009-10) only has data from August 2009. 

Such transfers did not drop in subsequent years. This led to the regulator warning against the practice a few years ago. Then Securities and Exchange Board of India (Sebi) Chairman U K Sinha pointed to problems in 2015. "In some instances, we have also found that valuations and inter-scheme transfers are not exactly according to the Sebi requirements…I want you to note…that we are watching. We are aware of what is happening….I want to give you an opportunity…please try and make amends," Sinha said at the Confederation of Indian Industry's annual MF summit in 2015. It has only gone up since then.