In a letter written to markets regulator Sebi on 19 March, the Association of Mutual Funds of India (AMFI) has warned of multiple areas of disruption for mutual funds due to the Covid-19 related restrictions in Mumbai. In particular AMFI highlighted Brihanmumbai Municipal Corporation (BMC) directives on mandatory reduction of staff strength in offices by 50%. According to AMFI, this will affect mutual funds and allied services such as Registrar and Transfer Agents (RTAs) and custodians.
AMFI highlighted three broad areas of disruption. First, disruption in customer services such as acceptance of physical forms. In lieu of this, mutual funds would accept requests from the registered email IDs of investors, the letter said. Other customer services such as processing of financial and non financial transactions, KYC, dispatching of physical cheques for redemptions and dividends, issue of monthly or half yearly customer account statement (CAS) and even declaration of Net Asset Value (NAV), daily scheme performance and Total Expense Ratio (TER) may be delayed. If the situation aggravates, AMCs may be forced to declare even working days as ‘non working days’, even if stock exchanges and banks are working on that day. Further AMCs would face challenges conducting dealing operations (trades) due to office closures and reporting of trades in corporate bonds and Commercial Paper/Certificates of Deposit. Finally, NISM exams for various types of financial personnel certification may not be possible.
AMFI asked Sebi to view mutual funds’ inability to comply with regulatory circulars and timelines leniently in view of the exceptional circumstances. It asked the regulator to extend timelines for filing various regulatory reports, conducting board and audit committee meetings and updates to Scheme Information Documents (SIDs) and Key Information Memorandums (KIMs). According to AMFI, mutual funds may not be able to comply with sector limits for debt funds set by a Sebi circular on 1 October, 2019 due to low liquidity, yield movements and high redemptions. It asked Sebi to relax norms on borrowing limits to meet redemptions on a case to case basis. Finally, it asked Sebi to defer the ongoing inspection by the regulator.
“I think these are very well thought out implications if the closure is extended. The critical thing to note is the dealing part. If we move to a remote location, then Sebi has to give us a clear path on how that would work given that all dealer calls have to be recorded. The rest I think can be managed digitally. There would be change in turn around times which have to be accepted by all involved," said the CEO of a mid-sized mutual fund on condition of anonymity.
Financial advisors placed emphasis on redemption transactions being honoured. "Maintaining smooth redemptions is of paramount importance, particularly for ultra short, liquid and similar short end debt fund categories. Email redemption is an excellent practice for this purpose, but there should be a second verification step by email or phone confirming the customer's bank account details," said Kalpesh Ashar, founder, Full Circle Financial Planners and Advisors. Joydeep Sen, founder, wiseinvestor.in raised questions as to whether the Covid crisis qualifies as a natural calamity under a 2016 Sebi circular allowing mutual funds to halt redemptions over ₹2 lakh. Sebi should clarify this, he maintained.
Some experts however asked for a full market closure. "The health of the people involved in the mutual fund industry is paramount. A better solution to the Covid-19 problem is a complete shutdown, rather than a half hearted attempt to keep the industry functioning," said Shyam Sekhar, founder and Chief Ideator, iThought.