ISSUE OF SEBI GUIDELINES TO ALL MUTUAL FUNDS IN INDIA

Acknowledging the fact that the securities market including mutual funds were worst hit by the impact of COVID-19, the Securities and Exchange Board of India (SEBI) has made an announcement having the effect of increasing obligation on such MFs.

Accordingly, the mutual funds in India shall be required to embark on their secondary market trade to at least 10% of their trade-in corporate bonds through the RFQ or the Request for Quote (RFQ) platform of stock exchanges commencing from  1 October 2020.

This step has been taken to boost the liquidity on the exchanges for secondary market bond transactions. The regulator also mandated mutual funds to disclose their portfolio every 15 days rather than month-end portfolios and some of the funds issuing half-monthly portfolios.

Additionally, the market regulator has also made it compulsory for the mutual funds to disclose the number of earnings of their principal instrument which earlier was only limited to divulging details of the yield of the entire portfolio and not any individual securities concerned. Such disclosures relating to yields received from individual securities will ensure better transparency in the interests of the investors, especially those who invested earlier involving greater risks and got trapped as compared to investing in lower-rated papers.

Further, on the recommendation of the Mutual Fund Advisory Committee (MFAC), it has been decided that the secondary trades shall be performed through the RFQ platform but it shall not involve inter-scheme transfers. The RFQ platform will ensure negotiated deals across securities in the platform through electronic means and will warrant transparency and appropriate disclosures in case of debt schemes and fund units where investments are made in corporate bonds and commercial papers.

Presently, all the Trading in corporate bonds is primarily done OTC (over the counter), which is later reported to the exchanges. Intending to create a replica of the OTC nature, however with better transparency including better price discovery and transparency through electronic mode the RFQ platforms have been created through the SEBI.

It was also stated that all transactions in corporate bonds and commercial papers wherein a mutual fund is on both sides of the trade will be executed through the RFQ platform of stock exchanges in one-to-one mode, and any transaction entered into by a mutual fund in corporate bonds in the one-to-many model and gets executed with another mutual fund shall also be counted for the 10% requirement.

Author:

eStartIndia Team