In January this year, Madhabi Puri Buch, chairperson of the Securities and Exchange Board
of India (Sebi), had revealed that the markets regulator was in active discussion with the MF industry to do a compre- hensive stress test of equity schemes and figure out meas- ures to tackle situations when the test results indicate red flags. The stress test reports are set to be disclosed to the public for the first time on March 15.
These new disclosures form part of measures that Sebi has planned in a bid to shield small- cap and midcap fund investors amid increasing valuation risks. Ithas also asked MF trustees to establish an investor protection framework and suggested mea- sures, such as limiting inflows and portfolio rebalancing.
The format designed by Amfi also includes detailed guidelines for stress tests. MFs will need to specify the time required to liquidate 25 per cent and 50 per cent of the portfolio on a pro-rata basis. The test must be conducted excluding the 20 per cent of the portfolio that is most illiquid.
“While it is not mandatory for assets management com- panies (AMCs) to sell securities on pro-rata basis (i.e. sell secu- rities in the same ratio as the portfolio composition), for the purpose of stress test it is assumed that a mutual fund scheme will sell the securities on a pro-rata basis to ensure equal treatment to all investors of the scheme,” Amfi said.
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