Sebi reviews prudential norms for mutual fund investment in derivatives

The Securities and Exchange Board of India (Sebi) has reviewed the prudent norms for investment in derivatives by mutual funds, and has decided that for introduction of derivative investments in an existing scheme, whose scheme information documents (SIDs) do not currently envisage such investments, the requirement of obtaining positive consent from majority of unit holders shall no longer be required.

However, prior to the scheme commencing participation in derivatives, all investors of such schemes should be given exit option with no exit load for 30 days, as against exit option to only dissenting unit holders mandated earlier.

In view of the above, Sebi has amended its earlier circular to read as follows: ''Existing schemes of mutual funds, whose SIDs do not envisage investments in derivatives, may participate in derivatives market subject to the following conditions:

  • The extent and the manner of the proposed participation in derivatives shall be disclosed to the unit holders;
  • The risks associated with such participation shall be disclosed and explained by suitable numerical examples;
  • Prior to commencing participation in derivatives, the scheme shall comply with the provisions of Regulation 18 (15A) of SEBI (Mutual Funds) Regulations, 1996 and all unit holders shall be given at least 30 days to exercise option to exit at prevailing NAV without charging of exit load.''

Sebi said all other provisions of the regulations mentioned circular remains unchanged.

Sebi said it has received representations from mutual fund bodies suggesting that for existing schemes' whose SIDs do not currently envisage investments in derivatives, obtaining positive consent from majority of unit holders as mandated by Sebi regulations is challenging on account of the vast geographical spread of unit holders and has sought the regulator's consent for doing away with such requirements.

Sebi said the matter was discussed in Mutual Fund Advisory Committee, wherein it was recommended that for participation in derivatives market by such schemes, the requirement of obtaining positive consent should be dispensed with and all investors of the scheme should be given exit option with no exit load, in line with the guidelines for changes in any other fundamental attribute of the scheme.

As per extant rules, existing schemes of mutual funds, whose SIDs do not envisage investments in derivatives, are required to obtain positive consent from majority of the unit holders before commencing investment in derivatives. An exit option has to be provided to the dissenting unit holders and such option is to be kept open for a period of one month prior to the scheme commencing trading in derivatives.