SEBI amends guidelines on Interval Mutual Fund Schemes

Interval Schemes are those schemes in which subscription can be made during a specific period (known as transaction period) and repurchase of units is permissible on all business days subject to applicable loads (except for redemption during specified transaction period when no load is charged).

Given that there is no restriction on tenure of the securities in which the interval scheme can invest, this coupled with the daily redemption option may result in asset liability mismatch. Accordingly, the Securities and Exchange Board of India (“SEBI”) has vide its circular dated November 26, 2010 (“Circular”) has prescribed the following in relation to the intervals schemes:

a) The units of the schemes are required to be mandatory listed.

b) The redemptions in interval funds will only be allowed during specified transaction period which is required to be minimum two working days.

c) The minimum duration of an interval period in an interval scheme/plan is required to be 15 days.

d) The investments by these schemes are required to be made only in those securities which mature on or before the opening of the immediately following specified transaction period.

e) In case of securities with put and call option, the residual time for exercising the put option of the securities it will not be beyond the opening of the immediately following transaction period.

f) The Asset Management Companies (“AMC”) are required to ensure compliance with these guidelines from the date of next specified transaction period or April 1, 2011 whichever is later.

In relation to cut-off timings for applicability of Net Asset Value (NAV) of mutual fund scheme, the SEBI has, vide the Circular, amended certain provisions of its circular dated October 11, 2006 in the following manner:

a) The following cut-off timings are required to be observed by a mutual fund in respect of the purchase of units in liquid fund schemes and their plans, and the following NAVs are required to be applied for such purchases:

i. in cases where the application is received up to 2 pm on a day and funds are available for utilisation before the cut-off time without availing any credit facility - the closing NAV of the day immediately preceding the day of application.

ii. in case applications received after 2 pm on a day and funds are available for utilization on the same day without availing any credit facility - the closing NAV of the day immediately preceding the next business day.

iii. irrespective of the time of receipt of application, if funds are not available for utilization before cut-off time - the closing NAV of the day preceding the day on which the funds are available for utilisation.

b) For the allotment of units in respect to purchase in liquid schemes, it is required to be ensured that:

i. the application is received before the applicable cut - off time;

ii. the funds for the entire amount of subscription/purchase as per the application are credited to the bank account of the respective liquid schemes before the cut-off time;

iii. that the funds are available for utilization before the cut-off time without availing any credit facility whether intra-day or otherwise, by the respective liquid schemes.

c) For the allotment of units in respect of switch-in to liquid schemes from other schemes, it is required to be ensured that:

i. the application for switch-in is received before the applicable cut-off time;

ii. funds for the entire amount of subscription/purchase as per the switch-in request are credited to the bank account of the respective switch-in liquid schemes before the cut-off time;

iii. the funds are available for utilization before the cut-off time without availing any credit facility whether intra-day or otherwise, by the respective switch-in schemes.

The Circular has also clarified the provisions of Clause 6 (2A) of the circular dated October 24, 2008 in the following manner:

a) For the allotment of units in respect of purchase in income/debt oriented mutual fund schemes/plans other than liquid schemes, it is required to be ensured that:

i. the application is received before the applicable cut-off time;

ii. the funds for the entire amount of subscription/ purchase as per the application are credited to the bank account of the respective scheme before the cut- off time;

iii. the funds available for utilization before the cut-off time without availing any credit facility whether intra-day or otherwise, by the respective scheme.

b) For the allotment of units in respect of switch-in to income/debt oriented mutual fund schemes/plan other than liquid schemes for other schemes, it is required to be ensured that:

i. the application for switch-in is received before the applicable cut-off time;

ii. the funds for the entire amount of subscription /purchase as per the switch-in request are credited to the bank account of the respective switch-in income/debt oriented mutual fund schemes/plans before the cut-off time;

iii. the funds are available for utilization before the cut-off time without availing any credit facility whether intra-day or otherwise, by the respective switch-in income/debt oriented mutual fund schemes/plans.

The SEBI has also advised the AMCs to not acquire any the assets out of the scheme property which involves the assumption of any unlimited liability or which may result in encumbrance of the scheme property in any way.