Coronavirus outbreak: Sebi eases compliance requirements for brokers, MFs

Topics Coronavirus | Sebi | Sebi norms

The industry also informed the regulator that as MFs as well as registrar and transfer agents have been hit by lower staff strength
The Securities and Exchange Board of India (Sebi) has met mutual fund (MF) industry's demands for relaxing norms pertaining to compliance requirements. The MF industry had sought certain exemptions from the Sebi. These pertain to compliance requirements for order executions following the government’s work-from-home directive, meeting sectoral exposure norms in debt schemes amid a liquidity crunch, and an increase in borrowing limits as redemptions could spike due to the virus scare.

The industry had also informed the regulator that in the prevailing environment, where MFs as well as registrar and transfer agents (RTAs) have been hit by lower staff strength, it may not be possible to accept physical transactions from investors. As an alternative, MFs and RTAs will accept transaction requests from registered e-mail accounts of unitholders.

Among other challenges, the industry is anticipating delays in publishing daily net asset values (NAVs), or in dispatching physical cheques for redemption and dividend payments.

The Association of Mutual Funds in India (Amfi) informed Sebi in a letter that it may not be possible for MFs to conduct dealing operations from their own premises, and so dealers have to operate from an alternative site, or their residence.

“In such a scenario, the access controls presently exercised in MF dealing rooms would not be available at such alternative locations or residences of dealers. Further, call recording of deals and records for submission of mobile phones, etc, may not be feasible,” the industry body pointed out.

Fund houses have assured Sebi that dealers would be advised to strictly comply with regulatory requirements and not indulge in activities that could result in non-compliance. “Sebi has been quite stringent in its inspections in the past and rightly so. However, some exemptions might be needed in the present conditions,” said an executive of a fund house. 

Cases of front-running have come under regulatory scanner, where a dealer takes unfair advantage of an order placed by a fund house.

“… all deals concluded would be followed by an electronic confirmation by way of email or through other systems like Reuters Messenger/Bloomberg Chats, etc…”

Further, fund houses want Sebi to be lenient on participants who are unable to comply with the new regulatory norms within the stipulated timelines, given the virus scare.

Amfi has also highlighted the liquidity crunch in debt markets, which makes it difficult for MFs to meet sectoral limits in debt schemes and to exit from unlisted debt securities within the regulatory timeline.

“… owing to the high market volatility on account of the Covid-19 scare and the year end, the industry is seeing significant yield movement, low liquidity, and large redemptions,” Amfi said in its letter.

Sebi had, in October, capped the sectoral limit on exposure in debt schemes at 20 per cent, down from 25 per cent, in light of concerns around asset-liability profiles of non-banking financial companies. The additional sectoral exposure limit for housing finance companies (HFCs) was capped at 10 per cent from 15 per cent. The overall exposure limit was kept at 20 per cent for HFCs.  This norm was to come into force from April 1, 2020.

MFs have asked Sebi to give the industry time till June 30 to re-balance the revised sectoral limits, and said any breach by any participant will be passive in nature.

MFs were also required to cut exposures to unlisted non-convertible debentures (NCDs) in a graded manner. By March 31, the individual scheme-level exposure was to be reduced to 15 per cent and to 10 per cent by June.

“… the existing stock of unlisted NCDs has become illiquid and untradeable, subsequent to the Sebi circular…” the letter said.

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