Alternative Investment

SEBI allows AIFs to participate in CDS transactions; allows MFs to switch from Active to Passive ELSS schemes

Sebi allows AIFs to participate in Credit Default Swap transactionsOn January 12, 2023, the Securities and Exchange Board of India (SEBI) has amended the SEBI (Alternative Investment Funds-AIF) Regulations, 2012 to allow Alternative Investment Funds (AIFs) to participate in the Credit Default Swaps (CDS) market as protection buyers and sellers.

  • Regulations 16(1)(aa),17(da), 18(ab)and 20(11) of AIF Regulations enable AIFs to participate in CDS.
  • This permit will facilitate deepening of the domestic corporate bond segment, and enable business entities to hedge risks associated with the bonds market.

What is CDS?

It is a specific kind of counter-party agreement which allows the transfer of third party credit risk from one party to another.

Key Points:

i.Category-I and Category-II AIFs can buy CDS on underlying investment in debt securities only for the purpose of hedging.

ii.Category-III AIFs can purchase CDS for hedging or any other permissible purpose.

iii.With regard to selling, Category-II and Category-III AIFs may sell CDS by earmarking unencumbered government bonds or Treasury bills equal to the amount of the CDS exposure.

  • Category III AIFs are allowed to sell CDS within the permissible limits.

iv.AIFs will have to report details of CDS transaction to the custodian by the next working day.

v.Any unhedged position, which would result in gross unhedged positions across all CDS transactions exceeding 25% of investable funds of the scheme of an AIF, should be taken only after intimating to all unit holders of the scheme.

vi.Category I and II AIFs cannot borrow or utilize funds directly or indirectly except for meeting temporary funding requirements for not more than 30 days, not more than four occasions in a year and not more than 10% of the investable funds.

vii.AIFs which transact in CDS will have to maintain a 30-day cooling off period between the two periods of borrowing.

The information for the same was provided by SEBI in exercise of powers conferred under Section 11(1) of the SEBI Act, 1992  to  protect  the  interests  of investors  in  securities  and  to  promote  the  development  of  the securities market.

Click Here for Official Circular

SEBI allows MFs to switch from active to passive ELSS schemes

SEBI also allowed Mutual Funds (MFs) with active Equity-Linked Savings Schemes (ELSS) to launch passively managed open-ended ELSS schemes.

  • This will provide a cost-effective and tax-saving alternative to individual investors.

What is in the scheme?

i.For switching, MF is required to stop all fresh inflows or subscriptions, including systematic investment plans (SIPs) and systematic transfer plans (STPs), to the actively managed ELSS scheme.

  • This will be done through a written communication about the proposed change, along with reasons and benefits of such change, is sent to each unitholder.

ii.AMCs will provide an option to investors to redeem their units without exit load subject to lock-in requirements.

iii.After completion of three years from the date of stopping inflows in the actively managed ELSS scheme, the scheme will be merged with the passively managed ELSS scheme and the investments will be managed through the passively managed scheme.

iv.The passive ELSS scheme should be based on one of the indices comprising equity shares from the top 250 companies in terms of market capitalization.

Points to be noted:

i.It should be noted that the investments under the ELSS scheme have a three-year lock-in period, which is the shortest lock-in period as compared to other tax-efficient products. Investors can also get a tax deduction of up to Rs 1.5 lakh per financial year under Section 80C of the IT (Income Tax) Act.

ii.The asset under management of actively managed ELSS scheme has increased 5% to Rs 1.55-lakh crore in December 2022 from Rs 1.47-lakh crore in January 2023.

  • Currently, there are 42 actively managed ELSS schemes.

SEBI allows launch of multiple contracts of same commodity

SEBI has allowed the stock exchanges to launch multiple contracts of a commodity to attract more participation of investors in commodity derivatives market. For its implementation exchanges are required to make necessary amendments to the relevant bye-laws, rules and regulations, and inform the same to their members.

  • This decision follows the request of stock exchanges to launch multiple contracts on same commodity for greater participation.
  • Earlier only single contract is required for particular commodity, except for gold, silver and precious metals.

The information for the same was provided by SEBI in exercise of powers conferred under Section 11(1) of the SEBI Act, 1992.

Click Here for Official Circular

Recent Related News:

i.SEBI has increased the investment limit of MFs in debt instruments issued by a single issuer to 12% of the Net Asset Value (NAV) from 10% w.e.f. November 29, 2022 on all new schemes.

ii.In an attempt to enhance the availability of securities for trading by investors, the SEBI reduced the timeline for the listing of debt securities issued through private placement to T+3 days from the current timeline of T+4 days. (T refers to issue closure date).

About Securities and Exchange Board of India (SEBI):

Chairperson– Madhabi Puri Buch
Headquarters– Mumbai, Maharashtra
Establishment– 1992

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