Sebi writes to fund houses on breach in 25% investor cap

Regulator warns fund houses over huge fluctuations in debt schemes

Several large fund houses have drawn flak from the Securities and Exchange Board of India (Sebi) for breaching the 25 per cent single-investor ceiling in debt schemes. Sources said Sebi had written to about 30 mutual fund (MF) houses, saying the investment limit was sacrosanct and should always be maintained.

A special analysis conducted by the capital market regulator’s investment management department revealed huge fluctuations in debt scheme assets, with some periodically crossing the 25 per cent single-investor ceiling. The study revealed lapses at fund houses had allowed several large institutional investors and wealthy clients to invest and redeem huge sums, occasionally violating investment norms.

According to Sebi norms, any investor cannot own more than 25 per cent of a scheme’s assets, at any point.

Executives in the sector said the fluctuations in net asset value were primarily due to institutional shareholders such as banks and large companies, who often parked their excess cash in mutual fund debt schemes.

Sources said the Association of Mutual Funds in India (Amfi) had set up a panel to analyse the issue, which had affected several fund houses, and to suggest a solution. It is expected Amfi will soon write to Sebi on the matter.

“The probe by Sebi has shown typically, in the beginning of a quarter, particular investors account for more than 25 per cent of a scheme’s assets. In the same quarter, the investor’s holding drops to nil,” said a source.

Fund houses maintain the breach of investment limit is an operational issue, not wilful wrongdoing. The chief executive of a fund house said, “We have replied to the regulator, saying the breach is not intentional, but more of an operational hazard. Institutional investors are looking for liquidity and they end up parking or withdrawing huge sums at a go.”

The Amfi panel has also been mandated to check whether the breaches at fund houses were active or passive (beyond fund houses’ control).

Experts said the investment limit had been set to mitigate concentration risks. Sebi feels breaching the 25 per cent limit could put schemes at risk. Also, it is concerned huge investments and withdrawals by large investors could compromise the interests of other investors, especially retail ones.

Besides the individual investment cap, Sebi has also prescribed a 30 per cent sectoral cap for mutual fund debt schemes. The move was introduced in 2012, after fund houses were found taking huge exposure to specific sectors.
HITTING THE ROOF

• Regulator asks fund houses to ensure limit isn’t breached in future
• Single investor investments had touched as much as 30% in some schemes
• Fund houses say breach due to operational difficulties
• Mutual fund industry body sets up panel to probe issue