Restriction on redemption in Mutual Funds
Summary
SEBI mandates that redemption restrictions in mutual funds apply only during systemic crises causing broad market illiquidity rather than entity-specific issues. The circular limits such restrictions to a maximum of 10 working days within any 90-day period and exempts redemption requests up to INR 2 lakh from these constraints. Approval from the Board of Directors of AMCs and Trustees is required before imposing restrictions, which must be disclosed prominently in scheme documents.
Text
Restriction on redemption should apply during excess redemption requests arising in overall market crisis situations rather than exceptional circumstances of entity specific situations.
Restriction may be imposed when market at large becomes illiquid affecting almost all securities rather than any issuer specific security; restriction due to illiquidity of a specific security due to poor investment decision shall not be allowed.
Restriction may be imposed when markets are affected by unexpected events impacting exchange functioning or regular transactions, including political, economic, military, monetary or other emergencies.
Restriction may be imposed for force majeure, unpredictable operational problems, and technical failures occurring despite appropriate diligence and effective disaster recovery procedures.
Restriction on redemption may be imposed for a specified period of time not exceeding 10 working days in any 90 days period.
Any imposition of restriction would require specific approval of Board of AMCs and Trustees and the same should be informed to SEBI immediately.
No redemption requests upto INR 2 lakh shall be subject to such restriction.
Where redemption requests are above INR 2 lakh, AMCs shall redeem the first INR 2 lakh without such restriction and remaining part over and above INR 2 lakh shall be subject to such restriction.
The possibility that right to redeem may be restricted in exceptional circumstances and the time limit for which it can be restricted shall be disclosed prominently and extensively in scheme related documents.
This circular shall be applicable immediately for all schemes to be launched on or after the date of this circular and all existing schemes with effect from July 01, 2016.
Source: SecMarx — Restriction on redemption in Mutual Funds. Verbatim text is public record; SecMarx structuring (linkage to applying orders) is cited to us.