The Securities and Exchange Board of India (SEBI) has announced measures that allow mutual fund houses to limit redemptions in case they are in the midst of a systemic crisis or face a condition that severely limits their liquidity. Currently, the redemption limit for individual investors is set by SEBI at Rs. 2 lakhs in case the restrictions are in effect. The rule stipulates that redemption requests of up to Rs. 2 lakhs would be redeemed without restriction. Whereas, requests above Rs. 2 lakhs would be subject to restrictions only till the extent the redemption amount exceeds the Rs. 2 lakhs mark. According to experts, these new rules are a direct result of the recent redemption crisis faced by JP Morgan with regard to two schemes featuring Amtek Auto.
Apart from SEBI’s stipulation that such redemption limit is only allowed in case of broad liquidity issues that have the capability to affect a range of securities instead of a specific one. Some of the key events that can lead an AMC (Asset Management Company) to limit mutual fund redemptions include severe problems related to operations, stock exchange closures, market failures, etc. An additional stipulation with regard to the new measure is that, such restrictions can be kept in place by an AMC for a maximum period of 10 days if prior approval from the mutual fund company’s trustees and the board has been obtained. The new rule is expected to be in effect from July onwards.