MUMBAI: Markets regulator Securities and Exchange Board of India (Sebi) on Monday floated a consultation paper on introducing swing pricing in Indian markets that could reduce the risk of run on a mutual fund scheme and reduce first-mover advantages in the case of redemption pressure. Swing pricing is a mechanism by which fund houses can effect changes in NAVs in response to inflows and outflows. Conceptually, swing pricing protects the interests of long-term unit holders from value erosion due to heavy redemptions of others within the same fund.
This move by Sebi is part of the series of reforms undertaken to protect investor interest, given the fall-out of shutting down of six debt funds by Franklin Templeton Asset Management (India) Pvt. Ltd in April last year.
“Swing pricing is a potential risk mitigation measure for any product with liquidity risk. This is particularly acute with open-ended debt mutual funds, especially in times of market stress. Even 10-15% redemption of AUM in a short span of time can adversely impact the fund,” said Kaustubh Belapurkar, director manager-research, Morningstar Advisor India.
While swing pricing will be optional during normal market time, Sebi has proposed to mandate the mechanism for high-risk open-ended debt schemes during market dislocation, as these carry high risk securities compared to other schemes which possibly have higher costs of liquidation.
“During market dislocation, applicability of minimum swing factor will be as stipulated by Sebi which shall be risk-based. Beyond this, the asset management company (AMC) can choose to levy higher swing factor if it considers such a factor to be in the best and equitable interest of its unitholders,” Sebi said in the paper, which has been put up on the regulator’s website for comments from stakeholders.
The regulator has proposed a minimum swing factor of 1-2% for open-ended debt schemes based on their risk profile.
When swing pricing mechanism is triggered, and swing factor is made applicable—during normal time or market dislocation—both entering and exiting investors will ideally get a NAV adjusted for swing pricing. As a relief for small investors, redemptions up to ₹2 lakh for all unitholders and up to ₹5 lakh for senior citizens at the mutual fund level will be exempt from swing pricing.
While swing pricing may be new to India, the concept has already been implemented in countries such as the US, Luxembourg, Hong Kong, France and the UK. Sebi will also examine the applicability of swing pricing mechanism to equity schemes, hybrid schemes, solution-oriented schemes and other schemes such as index funds or exchange-traded funds (ETFs).
“There are some drawbacks to this. It can deter corporates from investing in the smaller debt funds because the threshold for implementing swing pricing there will be lower. For example, a 5% threshold is ₹5 crore in a ₹100 crore fund while it is ₹50 crores in a ₹1,000 crore fund. Corporate treasuries usually have large amounts to invest. Secondly, corporates might try to game the system. If the threshold is announced at 5%, people will try to redeem say 1% per day instead of 5% in a single day,” said a debt fund manager on condition of anonymity.
To be sure, internationally, in the case of many fund houses, the thresholds are confidential, in order to prevent any attempt to avoid a price swing by subscribing or redeeming in an amount just below the threshold.
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