The Market Regulator, Security, and Exchange Board of India (SEBI) notified the amendment in two Circulars on Mutual Funds regarding Uniformity in the applicability of Net Asset Value (NAV) and Trade Execution and Allocation.
As per paragraph 1 of SEBI Circular dated September 17, 2020, the uniform applicability of NAV in respect of the purchase of units of mutual fund schemes upon realization of funds, was to come into effect from January 1, 2021.
However, Upon consideration of the subsequent representation received from AMFI regarding operational challenges, the SEBI has been decided to extend the date of applicability of the aforementioned provision to February 1, 2021.
In partial modification to paragraph 2 on ‘Trade Execution and Allocation’ of SEBI Circular dated September 17, 2020, the Board has been decided to issue various modifications.
The AMCs shall use an automated Order Management System (OMS), wherein the orders for equity and equity-related instruments of each scheme shall be placed by the fund manager of the respective schemes.
However, a fund manager may authorize an employee of the AMC for order placement on his behalf if two conditions are fulfilled.
Firstly, the order instructions to such employees by the fund manager shall be through electronic mode i.e. either through e-mail or other electronic utility, wherein scheme wise audit trail of such orders starting from the instruction of the fund manager is maintained along with time stamping of each stage of the process.
Secondly, the employee placing the order shall be bound by the same requirements of maintaining confidentiality and the code of conduct as applicable to the fund manager in this regard i.e. in respect of order placement.
The orders in case of arbitrage transactions, stock lending and borrowing transactions, passive schemes (such as Index Funds and ETFs) and schemes investing primarily based on predefined rules and models, where the discretion of the fund manager is not required for placement of order, is not mandated to be placed through OMS, subject to various conditions
Firstly, the AMC shall document and demonstrate that no judgement and discretion of the fund manager is required for placement of such orders.
Secondly, the AMCs shall ensure that orders in breach of applicable regulatory limits and allocation limits as specified in Scheme Information Documents (SIDs), should not be placed and executed.
Thirdly, the fund manager shall provide the scheme wise details as required for order placement such as value of transaction(s), nature of transaction(s), etc. to the dealer.
Lastly, the scheme-wise audit trail of placement of orders (including the information provided by the fund manager), order execution, and trade allocation shall be maintained along with time-stamping of each stage of the process.
The Board has further notified that all orders of fund manager shall be received by a dedicated dealer(s) responsible for order placement and execution. However, in the case of orders for arbitrage transactions, stock lending, and borrowing transactions, passive schemes (such as Index Funds and ETFs), and schemes investing primarily based on predefined rules and models, the requirement of a dedicated dealer shall not be mandatory.
“Audit trail of activities as detailed in paragraph 2.2.1 related to order placement, trade execution, and allocation shall be available in the system. Further, there should be time stamping with respect to orders placed by the fund manager (or the order placed by the employee of the AMC authorized by the fund manager), orders placed by dealers, order execution, and trade allocation in the OMS. The audit trail and time stamping of all other orders (including orders through RFQ platform) not placed through OMS shall also be adequately maintained,” the SEBI notified.
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