SEBI proposes extending time to determine NAV for redemption of mutual fund overnight schemes

The change is being proposed to allow time to stock brokers/clearing members to un-pledge units of MFOS and place redemption request with Mutual Funds, after the close of market hours.

The market regulator has proposed that the cut-off timing to determine applicable net asset value (NAV) with respect to repurchase (redemption) of units in mutual-fund overnight schemes (MFOS) from existing 3 pm to 7 pm.

This is following the regulator's directions to stock brokers and clearing members to upstream client funds to clearing corporations on an end-of-day basis. The funds should be upstreamed wither as either cash, lien on Fixed Deposit Receipts created out of clients’ funds, or pledge of units of MFOS created out of clients’ funds.

The consultation paper issued on January 20 by the Securities and Exchange Board of India (SEBI) said, "Investment in MFOS, which is a new avenue made available to SBs/ CMs to deploy client funds, ensures minimal risk transformation of client funds (that are withdrawable on demand) available with SBs/ CMs because of overnight tenure and exposure to only risk - free government securities." Brokers and CMs also must ensure that client funds are invested only in such MFOS that deploy funds into risk-free government bond overnight repo markets and overnight Tri-party Repo Dealing and Settlement (TREPS).

The paper said, to operationalise this, a Working Group of industry participants, AMFI and members of the Mutual Funds Advisory Committee (MFAC) has recommended a change in cut-off timings to determine applicable NAV with respect to repurchase (redemption) of units in overnight fund schemes from existing 3:00 PM to 7:00 PM.

The change is being proposed to allow time to stock brokers/clearing members to un-pledge units of MFOS and place redemption request with Mutual Funds, after the close of market hours.

The overnight schemes receive money invested in securities with 1 day maturity on next working day. For meeting redemption requests, the overnight schemes don’t have to make any sale transaction before market hours. Instead the overnight schemes, based on redemption requests, may decide not to reinvest the maturity proceeds to be received on T+1 settlement date. Since the money has to be invested every day, for the amount of redemption requests received on T-day, such amount is not-reinvested on T+1 day and instead is used for payouts. Due to this, the timeline of redemption, whether being 3 PM or 7 PM shall not impact the funds valuation or capability to redeem investments."