Executive Summary:
This circular from SEBI modifies regulations for Mutual Funds (MFs) and Asset Management Companies (AMCs). It standardizes Net Asset Value (NAV) applicability upon fund realization and mandates a written policy for trade execution and allocation. The circular is effective from January 1, 2021.
Key Points / Main Content:
NAV Applicability:
* For mutual fund schemes (excluding liquid and overnight schemes), the closing NAV of the day applies when funds are available for utilization, regardless of size or receipt time.
* Existing NAV applicability for liquid and overnight funds and cutoff timings remain unchanged.
Trade Execution and Allocation Policy:
* AMCs must implement a written policy detailing roles/responsibilities for fund management, dealing, compliance, risk management, and back-office concerning order placement, execution, and trade allocation.
* The policy must ensure fair and equitable treatment of all schemes and investors.
* The AMC Board and trustees must approve the policy and ensure compliance.
Requirements for Equity and Equity-Related Instruments:
* AMCs must use an automated Order Management System (OMS) for order placement by fund managers.
* Fund managers must place scheme-wise orders when managing multiple schemes.
* Regulatory and allocation limits must be built into the OMS; changes require Compliance and Risk Officer approval.
* Dedicated dealers are responsible for order placement and execution based on fund manager orders.
* Prior approval from Compliance or Risk Officer may be required in certain scenarios defined within the AMC's internal policy.
Requirements for Investments in All Instruments:
* The dealing desk must be adequately staffed.
* All dealer conversations must occur on recorded telephone lines.
* Mobile phones and other communication devices are prohibited in the dealing room.
* Internet access in the dealing room is restricted to trade execution activities.
* Information sharing by dealers is limited to trade execution under the approved internal policy.
* Orders can be placed individually or pooled; the trade allocation policy must detail when each method is used and the timeline for pooling.
* Post-allocation, trades must be pro-rata based on order size and weighted average price.
* Deviations from pro-rata allotment are permissible only in exigencies, with prior written approval from the Chief Investment Officer, Risk Officer, and Compliance Officer.
* The policy must detail how margins/collaterals are segregated and placed without affecting investors' interests.
Monitoring and Compliance:
* AMCs must have a system-based monitoring mechanism to ensure compliance.
* Audit trails of order placement, trade execution, and allocation activities must be available with time stamping.
* Noncompliance and material information must be reported to trustees quarterly, who then inform SEBI in their half-yearly report.
Impact Analysis:
Mutual Funds (MFs) and Asset Management Companies (AMCs)
* Impact: Need to update NAV calculation procedures (excluding liquid and overnight schemes) and implement a comprehensive written policy on trade execution and allocation.
* Action Required: Modify NAV calculation, create and implement the written policy, ensure OMS compliance, monitor compliance, and report to trustees.
Trustee Companies / Boards of Trustees of Mutual Funds
* Impact: Increased oversight responsibility to approve and ensure compliance with the new trade execution and allocation policy.
* Action Required: Approve the AMC's policy, monitor compliance, and report noncompliance to SEBI.
Investors in Mutual Funds
* Impact: Enhanced transparency and fairness in trade execution and allocation, ensuring equitable treatment across schemes.
* Action Required: No direct action required; benefit from improved regulatory oversight.
Securities and Exchange Board of India (SEBI)
* Impact: Enhanced regulatory oversight and standardization in the mutual fund industry.
* Action Required: Monitor compliance through trustee reports and other regulatory mechanisms.
Key Entities Referenced
Securities and Exchange Board of India SEBI: Regulatory body for securities market in India, issuing this circular.
Mutual Funds MFs: Investment vehicles subject to the regulations outlined in the circular.
Asset Management Companies AMCs: Companies that manage mutual funds and are addressed in the circular.
Association of Mutual Funds in India AMFI: Industry association for mutual funds in India.
Net Asset Value NAV: The value of a mutual fund's assets less its liabilities, divided by the number of outstanding shares. The circular addresses uniformity in its applicability.
SEBI Circular No. SEBIIMDDF212012: A previous circular issued by SEBI, which is being partially modified by this circular.
Order Management System OMS: Automated system used by AMCs for placing orders for equity and equity related instruments.
Securities and Exchange Board of India Act, 1992: The act under which SEBI derives its powers to issue this circular.
CIRCULAR
SEBI/HO/IMD/DF2/CIR/P/2020/175 September 17, 2020
All Mutual Funds (MFs)/
Asset Management Companies (AMCs)/
Trustee Companies/ Boards of Trustees of Mutual Funds/
Association of Mutual Funds in India (AMFI)
Sir / Madam,
Subject: Circular on Mutual Funds
1. Uniformity in applicability of Net Asset Value (NAV) across various schemes upon
realization of funds
1.1. In partial modification to SEBI Circular No. SEBI/IMD/DF/21/2012 dated September 13,
2012, it has been decided that in respect of purchase of units of mutual fund schemes
(except liquid and overnight schemes), closing NAV of the day shall be applicable on which
the funds are available for utilization irrespective of the size and time of receipt of such
application.
1.2. The existing provision on NAV applicability for liquid and overnight funds and cut-off timings
for all schemes shall remain unchanged.
2. Trade Execution and Allocation
2.1. It has been decided that AMCs shall put in place a written down policy which inter-alia detail
the specific activities, role and responsibilities of various teams engaged in fund
management, dealing, compliance, risk management, back-office, etc., with regard to order
placement, execution of order, trade allocation amongst various schemes and other related
matters.
Page 1 of 42.2. The aforesaid policy shall ensure that all the schemes and its investors are treated in a fair
and equitable manner. Further, the policy shall be approved by the Board of AMC and the
trustees and they shall ensure compliance with the following:
2.2.1. For orders pertaining to equity and equity related instruments:
a) AMCs shall use an automated Order Management System (hereinafter referred to as
‘OMS’), wherein the orders for equity and equity related instruments of each scheme
shall be placed by the fund manager(s) of the respective schemes.
b) In case a fund manager is managing multiple schemes, the fund manager shall
necessarily place scheme wise order.
c) All regulatory limits and allocation limits as specified in SID shall be in-built in the OMS to
ensure that orders in breach of such limits are not accepted by the OMS. AMCs may
further place soft limits for internal control and risk management based on its internal
policy. Further, any change in limits specified in OMS shall be subject to the approval of
Compliance and Risk Officer.
d) All orders of fund manager(s) shall be received by dedicated dealer(s) responsible for
order placement and execution.
e) The internal policy of AMC may also provide certain scenarios within the regulatory
limits, wherein, prior approval of Compliance or Risk Officer would be required through
OMS before the order is received by the dealer.
2.2.2. Requirements with respect to investments in all instruments:
a) AMC shall ensure that the dealing desk is suitably staffed and comply with the following:
i. All conversations of the dealer shall be only through the dedicated recorded
telephone lines.
ii. No mobile phones or any other communication devices other than the recorded
telephone lines shall be allowed inside the dealing room.
Page 2 of 4iii. Restricted access to internet facilities on computers and other devices inside the
dealing room. It shall be used for activities related to trade execution only.
iv. No sharing of information by dealer through any mode, except for trade execution
under the approved internal policy.
b) Orders by dealer can be placed either for each scheme individually or pooled on the
basis of orders from multiple schemes. The trade allocation policy of the AMCs shall
inter-alia detail (i) specific situations (not generic) wherein the orders by dealers shall be
placed for each scheme individually or pooled from multiple schemes, (ii) the timeline to
be considered for pooling of orders in case of multiple schemes.
c) In case of pooled orders, post allocation of trades shall be on pro-rata basis as per the
size of the order placed. The said allocation shall be based on weighted average price.
The policy shall clearly include scenarios / situations (e.g. redemption pressure) in which
deviation from the allotment of units on pro-rata basis would be permissible, if at all.
Further, the deviations shall be on account of exigency only and require prior written
approval of Chief Investment Officer, Risk Officer and the Compliance Officer with
detailed rationale for such deviation.
d) In case of scenarios, wherein, the mutual funds are required to place certain margins /
collaterals in order to execute certain transactions, the policy shall include details on how
such margins / collaterals shall be segregated / placed from amongst various schemes,
without affecting the interest of investors of any scheme.
2.3. Monitoring of Compliance
2.3.1. AMC shall have a system based monitoring mechanism to ensure compliance with the
requirements under paragraph 2.2.1 and 2.2.2.
2.3.2. Audit trail of activities related to order placement, trade execution and allocation shall be
available in the system. Further, there should be time stamping with respect to order placed
by fund manager, order placed by dealer, order execution and trade allocation.
Page 3 of 42.3.3. Any non-compliance and all material information in this regard shall be reported to trustees
on quarterly basis. Trustees shall inform the same to SEBI in their half yearly trustee report.
3. Applicability:
The circular shall be applicable with effect from January 1, 2021.
4. 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,
Hruda Ranjan Sahoo
Deputy General Manager
Tel no.: 022-26449586
Email: hrsahoo@sebi.gov.in
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