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Sebi tightens rule on restricting investors' redemption requests

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Nearly a year after the Amtek Auto crisis hit two schemes of JPMorgan Asset Management Company, the Securities and Exchange Board of India ( Sebi) has said fund houses cant restrict investors redemption request still Rs.2lakh. Themarkets regulator has permitted fund houses a partial restriction on redemptionsinonlyemergency situations, meaningthosewhich couldleadtoasystemiccrisis. In acircular issued on Tuesday, it said recent instances of restrictions on redemption had necessitated arelook at the issue.
Under the new norms, effective July 1, on all existing and to- be- launched schemes, no redemption requests up to Rs.2 lakh will be subject to such a restriction. For redemption requests above this limit, the first Rs. 2 lakh may be redeemed.
However, asset management companies ( AMCs) cannot use this as an ordinary tool to manage aschemes liquidity. Sebi has specified the situations where AMCs may opt for this, after approval from their trustees and their board of directors. Further, they must immediately tell the Sebi.
AMCs can restrict redemptions in serious liquidity crises, when the market at large becomes illiquid, affecting almost all securities rather than any specific issuer. Imposition of a restriction "due to illiquidity of a specific security in the portfolio of a scheme due to a poor investment decision shall not be allowed". This brings in focus the JPMorgan crisis, wherein the fund house went ahead with capping redemption due to a single security, the toxic Amtek Auto papers. This had the investors crying foul.
Further, AMC sare allowed to use  the restriction tool during market failures due to operational problems and technical glitches. And, whenthemarkets are affected by unexpected events which could impact the functioning of exchanges. Such unexpected events could be related to political, economic, military, monetary or other emergencies, saidSebi. However, the period of any such restriction on redemption should not exceed 10 days in any 90- day period. Fund houses should inform their investors that their righttoredeemmayberestricted in exceptional circumstances.
Business Standard New Delhi, 1st June 2016

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