MANU/SMFD/0004/2016

Ministry : Securities and Exchange Board of India

Department/Board : Investment Management Department

Circular No. : SEBI/HO/IMD/DF2/CIR/P/2016/57

Date : 31.05.2016

Notification/ Circulars Referred : Circular SEBI/IMD/CIR No.5/126096/08 dated May 23, 2008 MANU/SMFD/0019/2008

Citing Reference:
Circular SEBI/IMD/CIR No.5/126096/08 dated May 23, 2008 MANU/SMFD/0019/2008  Referred

All Mutual Funds/Asset Management Companies (AMCs)/
Trustee Companies/Boards of Trustees of Mutual Funds

Sir/ Madam,

Restriction on redemption in Mutual Funds

1. Presently, in terms of circular SEBI/IMD/CIR No.5/126096/08 dated May 23, 2008, facility of restriction on redemption under any scheme of the mutual fund can be made only after the approval from the Board of Directors of the Asset Management Company (AMC) and the Trustees. The provisions are general in nature and do not specifically spell out the circumstances in which restriction on redemption may be applied; leading to discretionary disclosures and practices in the industry.

2. Recent instance resulting in application of restriction on redemption have necessitated a re-look into the circumstances that require such restriction on redemption. As a philosophy, restriction on redemption should apply during excess redemption requests that could arise in overall market crisis situations rather than exceptional circumstances of entity specific situations. The circumstances calling for restriction on redemption should be such that illiquidity is caused in almost all securities affecting the market at large, rather than in any issuer specific securities.

3. Therefore, in order to bring more clarity and to protect the interest of the investors, the following requirement shall be observed before imposing restriction on redemptions:

a. Restriction may be imposed when there are circumstances leading to a systemic crisis or event that severely constricts market liquidity or the efficient functioning of markets such as:

i. Liquidity issues - when market at large becomes illiquid affecting almost all securities rather th........