The Securities and Exchange Board of India (SEBI) recently released a draft circular seeking public comments on a significant proposal to amend the cut-off timings for determining the applicable Net Asset Value (NAV) concerning the redemption of units in Overnight Mutual Fund Schemes (MFOS). This change, proposed in collaboration with industry stakeholders, aims to enhance operational efficiency while safeguarding client funds entrusted to Stock Brokers (SBs) and Clearing Members (CMs).
Background: The Upstreaming Framework
The proposal stems from SEBI’s December 12, 2023, circular on the “Upstreaming of Clients’ Funds.” The framework mandates that SBs/CMs upstream all clear credit balances of their clients to Clearing Corporations (CCs) by the end of the trading day. These funds can be upstreamed in the form of cash, fixed deposit receipts, or pledged units of Overnight Mutual Fund Schemes.
The introduction of MFOS as a deployment avenue ensures that client funds remain secure and readily accessible due to the overnight maturity of these investments. These schemes invest solely in risk-free instruments such as government bonds, overnight repos, and Tri-party Repo Dealing and Settlement (TREPS), minimizing risk transformation.
To facilitate the operationalization of this framework, SEBI has proposed extending the cut-off time for redemption requests in MFOS from the current 3:00 PM to 7:00 PM.
Why the Cut-Off Time Change Is Important
The current 3:00 PM cut-off poses challenges for SBs/CMs managing client funds. Redemption requests often need to be processed after market hours, leaving insufficient time to un-pledge units of MFOS and submit requests to mutual funds.
By extending the cut-off to 7:00 PM, SBs/CMs will have adequate time post-market hours to handle un-pledging and redemption processes. This change aligns with the operational requirements of Overnight Schemes, which base redemption payouts on the proceeds of securities maturing the next day (T+1). The proposed timeline ensures smooth redemptions without impacting fund valuation or liquidity.
Impact on Investors and the Industry
For investors, the change does not affect the inherent benefits of Overnight Mutual Fund Schemes, such as safety, liquidity, and stable returns. These funds will continue to invest exclusively in short-term government securities, ensuring no compromise on risk mitigation or redemption capability.
For the mutual fund industry and intermediaries like SBs and CMs, the extended timeline enhances operational flexibility and efficiency. It ensures compliance with SEBI’s upstreaming framework while maintaining client confidence in the safety and liquidity of their investments.
Invitation for Public Comments
This proposal represents SEBI’s proactive approach to balancing regulatory compliance, market efficiency, and investor protection. By refining operational frameworks, SEBI aims to foster trust and resilience in the financial markets.
As the financial ecosystem evolves, measures like these reinforce India’s commitment to global best practices, ensuring a secure and efficient environment for all market.
