SEBI permits Creation of segregated portfolio in mutual fund schemes

Dec 28, 2018 | by Avantis RegTech Legal Research Team

The Securities and Exchange Board of India (SEBI) on December 28, 2018 has decided to permit creation of segregated portfolio of debt and money market instruments by mutual funds schemes, in order to ensure fair treatment to all investors in case of a credit event and to deal with liquidity risk.

·         Asset Management Company (AMC) may create segregated portfolio in a mutual fund scheme subject to the following:

a.       Segregated portfolio may be created, in case of a credit event at issuer level i.e. downgrade in credit rating by a SEBI registered Credit Rating Agency (CRA).

b.      In case of difference in rating by multiple CRAs, the most conservative rating shall be considered. Creation of segregated portfolio shall be based on issuer level credit events as detailed at paragraph C-1 and implemented at the ISIN level.

c.       Creation of segregated portfolio shall be optional and at the discretion of the AMC. It should be created only if the Scheme Information Document (SID) of the scheme has provisions for segregated portfolio with adequate disclosures.

d.      AMCs shall have a detailed written down policy on creation of segregated portfolio and the same shall be approved by the trustees.

·         Process for creation of segregated portfolio:

There are certain pre and post procedure to be followed by the AMC for the creation of segregated portfolio.

If the trustees do not approve the proposal to segregate portfolio, AMC shall issue a press release immediately informing investors of the same.

·         Valuation and processing of subscriptions and redemptions.

·         Disclosure Requirements:

In order to enable the existing as well as the prospective investors to take informed decision, certain conditions shall be adhered to regarding segregated portfolio.

·         TER for the Segregated Portfolio:

 AMC shall not charge investment and advisory fees on the segregated portfolio. However, TER (excluding the investment and advisory fees) can be charged, on a pro-rata basis only upon recovery of the investments in segregated portfolio.

The legal charges related to recovery of the investments of the segregated portfolio may be charged to the segregated portfolio in proportion to the amount of recovery.  

·         Monitoring of Trustees:

In order to ensure timely recovery of investments of the segregated portfolio trustee shall monitor the activities by AMC.

·         AMCs desirous of having a provision of segregated portfolio in existing scheme shall ensure that all relevant disclosures are made in the SID of such schemes. The provision to enable creation of segregated portfolio in the existing scheme shall be subject to compliance with Regulation 18(15A) of SEBI (Mutual Funds) Regulations, 1996.

·         The existence of the provisions for segregated portfolio should not encourage the AMCs to take undue credit risk in the scheme portfolio. Any mis-use of the provisions of segregated portfolio, would be considered serious and stringent action may be taken.

[Circular No SEBI/HO/IMD/DF2/CIR/P/2018/160]




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