The Securities and Exchange Board of India (Sebi) is working on a slew of reforms to ensure liquidity in debt mutual funds and help them manage redemption pressure. The steps include a so-called backstop facility, minimum investment in liquid assets and additional transaction cost for redemptions in schemes that have illiquid papers, said Sebi chairman Ajay Tyagi.

The industry has managed the Covid-19 crisis well, despite being hit by a couple of rough patches, Tyagi said ahead of the 25th Annual General Meeting of mutual fund industry body, Association of Mutual Funds in India (Amfi). In March and April, the underlying bond market had become illiquid and only super-rated papers and g-secs were finding buyers. Schemes that took credit risks and invested in lower-rated paper struggled to manage redemption pressures and illiquidity stress.

Sebi, along with the industry, managed the rough patches through some structural and interim measures. For long-term growth of the industry and protecting investor interest, prudential risk management is the only alternative, Tyagi said.

The Sebi chairman said the industry should ensure that the schemes launched are true to label. “Improper categorisation will only hurt and confuse the investor,” he said. This comes in the wake of Sebi coming out with a circular on September 11 mandating multi-cap funds to allocate at least 25% of their portfolios in large-, mid- and small-caps each by February 2021. The order had created apprehension within a section of the industry that it could have a destabilising effect on the market and lead to a huge amount of money flowing into small- and mid-cap companies in six months.

“We are not asking mutual funds to invest in these companies but just asking them to be true to label. Amfi has given us a couple of suggestions to help them implement the circular. We are considering them,” said Tyagi. Sebi is working to introduce steps such as skin-in-the-game of asset management firms in debt schemes, an additional transaction in schemes that are facing excessive redemptions to ensure liquidity for open-ended debt schemes and develop the corporate bond market beyond super-rated papers.

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