Creation of segregated portfolio in mutual fund schemes - SEBI - SEBI/HO/IMD/DF2/CIR/P/2018/160

CIRCULAR SEBI/HO/IMD/DF2/CIR/P/2018/160 December 28, 2018 All Mutual Funds (MFs)/ Asset Management Companies (AMCs)/ Trustee Companies/ Boards of Trustees of Mutual Funds/ Sir / Madam, Subject: Creation of segregated portfolio in mutual fund schemes A. In order to ensure fair treatment to all investors in case of a credit event and to deal with liquidity risk, it has been decided to permit creation of segregated portfolio of debt and money market instruments by mutual funds schemes. B. For the purpose of this circular, 1. The term segregated portfolio shall mean a portfolio, comprising of debt or money market instrument affected by a credit event, that has been segregated in a mutual fund scheme. 2. The term main portfolio shall mean the scheme portfolio excluding the segregated portfolio. 3. The term total portfolio shall mean the scheme portfolio including the securities affected by the credit event. C. AMC may create segregated portfolio in a mutual fund scheme subject to the following: 1. 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), as under: a. Downgrade of a debt or money market instrument to below investment grade , or b. Subsequent downgrades of the said instruments from below investment grade , or c. Similar such downgrades of a loan rating. 2. 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. 3. 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. 4. AMCs shall have a detailed written down policy on creation of segregated portfolio and the same shall be approved by the trustees. 5. Process for creation of segregated portfolio a. AMC shall decide on creation of segregated portfolio on the day of credit event. Once an AMC decides to segregate portfolio, it shall i. seek approval of trustees prior to creation of the segregated portfolio. ii. immediately issue a press release disclosing its intention to segregate such debt and money market instrument and its impact on the investors. The mutual fund should also disclose that the segregation shall be subject to trustee approval. Additionally, the said press release shall be prominently disclosed on the website of the AMC. iii. ensure that till the time the trustee approval is received, which in no case shall exceed 1 business day from the day of credit event, the subscription and redemption in the scheme shall be suspended for processing with respect to creation of units and payment on redemptions. b. Once trustee approval is received by the AMC, i. Segregated portfolio shall be effective from the day of credit event ii. AMC shall issue a press release immediately with all relevant information pertaining to the segregated portfolio. The said information shall also be submitted to SEBI. iii. An e-mail or SMS should be sent to all unit holders of the concerned scheme. iv. The NAV of both segregated and main portfolio shall be disclosed from the day of the credit event. v. All existing investors in the scheme as on the day of the credit event shall be allotted equal number of units in the segregated portfolio as held in the main portfolio. vi. No redemption and subscription shall be allowed in the segregated portfolio. However, in order to facilitate exit to unit holders in segregated portfolio, AMC shall enable listing of units of segregated portfolio on the recognized stock exchange within 10 working days of creation of segregated portfolio and also enable transfer of such units on receipt of transfer requests. c. If the trustees do not approve the proposal to segregate portfolio, AMC shall issue a press release immediately informing investors of the same. 6. Valuation and processing of subscriptions and redemptions a. Notwithstanding the decision to segregate the debt and money market instrument, the valuation should take into account the credit event and the portfolio shall be valued based on the principles of fair valuation (i.e. realizable value of the assets) in terms of the relevant provisions of SEBI (Mutual Funds) Regulations, 1996 and Circular(s) issued thereunder. b. All subscription and redemption requests for which NAV of the day of credit event or subsequent day is applicable will be processed as per the existing circular on applicability of NAV as under: i. Upon trustees approval to create a segregated portfolio - Investors redeeming their units will get redemption proceeds based on the NAV of main portfolio and will continue to hold the units of segregated portfolio. Investors subscribing to the scheme will be allotted units only in the main portfolio based on its NAV. ii. In case trustees do not approve the proposal of segregated portfolio, subscription and redemption applications will be processed based on the NAV of total portfolio. 7. Disclosure Requirements In order to enable the existing as well as the prospective investors to take informed decision, the following shall be adhered to: a. A statement of holding indicating the units held by the investors in the segregated portfolio along with the NAV of both segregated portfolio and main portfolio as on the day of the credit event shall be communicated to the investors within 5 working days of creation of the segregated portfolio. b. Adequate disclosure of the segregated portfolio shall appear in all scheme related documents, in monthly and half-yearly portfolio disclosures and in the annual report of the mutual fund and the scheme. c. The Net Asset Value (NAV) of the segregated portfolio shall be declared on daily basis. d. The information regarding number of segregated portfolios created in a scheme shall appear prominently under the name of the scheme at all relevant places such as SID, KIM-cum-Application Form, advertisement, AMC and AMFI websites, etc. e. The scheme performance required to be disclosed at various places shall include the impact of creation of segregated portfolio. The scheme performance should clearly reflect the fall in NAV to the extent of the portfolio segregated due to the credit event and the said fall in NAV along with recovery(ies), if any, shall be disclosed as a footnote to the scheme performance. f. The disclosures at paragraph 7(d) and 7(e) above regarding the segregated portfolio shall be carried out for a period of at least 3 years after the investments in segregated portfolio are fully recovered/ written-off. g. The investors of the segregated portfolio shall be duly informed of the recovery proceedings of the investments of the segregated portfolio. Status update may be provided to the investors at the time of recovery and also at the time of writing-off of the segregated securities. 8. TER for the Segregated Portfolio a. 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. b. The TER so levied shall not exceed the simple average of such expenses (excluding the investment and advisory fees) charged on daily basis on the main portfolio (in % terms) during the period for which the segregated portfolio was in existence. c. 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. However, the same shall be within the maximum TER limit as applicable to the main portfolio. The legal charges in excess of the TER limits, if any, shall be borne by the AMC. d. The costs related to segregated portfolio shall in no case be charged to the main portfolio. 9. Monitoring by Trustees a. In order to ensure timely recovery of investments of the segregated portfolio, trustees shall ensure that: i. The AMC puts in sincere efforts to recover the investments of the segregated portfolio. ii. Upon recovery of money, whether partial or full, it shall be immediately distributed to the investors in proportion to their holding in the segregated portfolio. Any recovery of amount of the security in the segregated portfolio even after the write off shall be distributed to the investors of the segregated portfolio. iii. An Action Taken Report (ATR) on the efforts made by the AMC to recover the investments of the segregated portfolio is placed in every trustee meeting till the investments are fully recovered/ written-off. iv. The trustees shall monitor the compliance of this circular and disclose in the half-yearly trustee reports filed with SEBI, the compliance in respect of every segregated portfolio created. b. In order to avoid mis-use of segregated portfolio, trustees shall ensure to have a mechanism in place to negatively impact the performance incentives of Fund Managers, Chief Investment Officers (CIOs), etc. involved in the investment process of securities under the segregated portfolio, mirroring the existing mechanism for performance incentives of the AMC, including claw back of such amount to the segregated portfolio of the scheme. 10. 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. 11. 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. D. This circular is issued in exercise of powers conferred under Section 11 (1) of the Securities and Exchange Board of India Act, 1992 , read with the provisions of Regulation 77 of SEBI (Mutual Funds) Regulations, 1996, to protect the interests of investors in securities and to promote the development of, and to regulate the securities market. Yours faithfully, Harini Balaji General Manager Tel no.: 022-26449372 Email: [email protected]