Why in news?
Securities and Exchange Board of India’s (SEBI) norms for mutual fund (MF) investments has given MF industry a new framework.
What are the new norms?
- The liquid mutual fund schemes will have to invest at least 20% of their funds in liquid assets like government securities mandatorily.
- They will be barred from investing more than 20% of their total assets in any one sector (the current cap is 25%).
- The limit is down to 10% for sectors like housing finance.
What is the need?
- After some mutual funds had to postpone redemption of their fixed maturity plans (FMPs), this industry came under SEBI’s scrutiny.
- After introducing a new standard framework for credit rating agencies in June month, the SEBI came up with more stringent regulations for MFs.
What are its significance?
- The mandated investment in government securities will ensure a modicum of liquidity.
- The reduction in sectoral concentration will discipline funds and diversify their risks.
- Some MFs entered into standstill agreements with companies in whose debt instruments the funds had invested, which are not a welcome practice.
- It goes against the interests of investors in the mutual fund.
- To increase the exit load on short-term investments in liquid MFs to discourage sudden demands for redemption.
Why should it be welcomed?
- SEBI has required that assets of mutual funds be valued on a mark-to-market basis in order to better reflect the value of their investments.
- To increase the exit load on short-term investments could possibly hinder fund flow into the bond market.
- SEBI is doing a commendable job in disciplining the markets and intermediaries.
- Market investments involve risk, and investors seeking high returns may be willing to assume the increased risk that comes with such investment.
- This is the concern of the regulator is probably more concerned about is the ripple effect of defaults and roll-overs on the system.
- Investor confidence can be shaken by defaults and that will have consequences for the economy.
Source: The Hindu
Quick Facts
Securities and Exchange Board of India (SEBI)
- It was established in 1992 in accordance with the provisions of the Securities and Exchange Board of India Act, 1992 (SEBI Act).
- The basic functions of SEBI
- To protect the investors interests in securities.
- To be a platform to promote, develop and regulate the securities market in India as well as the relating matters that are connected with it.
- To approve rules and laws pertaining to the stock exchanges.
- Examines books of accounts of financial mediators and recognized stock exchanges.
- To urge respective companies to list their shares in stock exchanges and manage the registration of distributors or brokers.
- SEBI board has three main powers – Quasi judicial, quasi legislative and quasi executive.
