The Security Exchange Board of India (SEBI) has found PGIM Asset Management Co Ltd, involved in an unfair inter-scheme transfer. The scheme transferred the good quality securities from closed-end funds to open-ended funds, while transferring stressed securities from open-ended schemes to closed-end schemes.
The regulator imposed a fine of 25₹ lakh on the AMC, the SEBI also found guilty AMC Chief Executive Officer, Anita Menon, fined 5₹ lakh and three fund managers, Kumaresh Ramakrishnan, Puneet Pal and Rakesh Suri, fined 2₹ lakh each on them.
The regulator observed that PGMI AMC transferred good quality securities from its closed-end funds to open-ended funds, notably transferring stressed securities from open-ended schemes to closed-end schemes. In this case, SEBI saw the transfer of stressed securities from open-ended schemes to closed-end schemes and good securities from closed-end schemes to open-ended schemes. The regulator observed that the securities were falling before or after the transfer to the fund.
The SEBI order stated that downgraded securities of Jorabat Shillong were transferred from the medium-term fund to the fixed duration fund, and Power Finance Corporation’s securities were transferred from the fixed duration fund to the mid-term fund. However, the power finance corporation securities did not stress. Therefore, the DHFL’s securities were also transferred to a fixed duration fund from a mid-term fund in October 2018. And the L&T House Financing’s securities were transferred from a fixed duration fund to a medium-term fund.
Inter-scheme transfers have been used by the fund management companies to serve the purpose of the scheme in which they are transferred.
However, the fund houses use Inter-scheme transfers to maintain the liquidity of the securities, especially transferring the open-ended fund to close-ended funds as the open-ended fund are traded on a daily based on their Net Asset Value (NAT). Whereas closed-end funds are mature in long term.
The fund houses have the risk of redemption of downgraded securities if they maintain less-liquidating securities in open-end funds and to divert this situation, fund houses chose the way to transfer securities from open-end funds to closed-end funds.
Meanwhile, the Security Exchange Board of India in, 2020 came up with a new measure for inter-scheme transfer. The new rules limit the fund management companies to using the securities transfer measures only in the case when other liquidation measures are not successful such as cash, market borrowing, or selling the downward securities in the open market.
