Regulatory uncertainty (Indian Express)

Mains Paper 3: Economy 
Prelims level: Securities and Exchange Board of India
Mains level: Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment

Context:

• Last week, the Securities and Exchange Board of India (SEBI) issued a circular specifying that multi-cap schemes of mutual funds must invest a minimum of 25% of their total assets in each large, mid and small-cap category.
• Until now, there was no such allocation criteria.

SEBI’s Directive:

• The guidelines had only prescribed that at least 65 per cent of the investments of such schemes be directed towards equities, giving fund managers the flexibility to allocate funds across large, mid or small-cap firms as per their discretion.
• A few days later, SEBI clarified that apart from rebalancing their portfolio, these multi-cap funds had other options, ranging from, merging with existing large-cap schemes, to converting these schemes to other categories.
• While SEBI’s directive may have been driven by the desire to ensure that these funds are “true-to-label”, its decision raises several questions: Why curb fund manager flexibility?
• Won’t changing the character of the fund heighten the risk and uncertainty for existing investors? Moreover, are their enough quality small-cap firms to absorb this inflow?
• If there were such companies available in this segment, wouldn’t they have been attractive proposition for fund managers to begin with?

Heightening market uncertainty:

• Mutual fund data from various fund houses shows that put together, the total assets of these multi-cap schemes stand at around Rs 1.45 lakh crore.
• Of this, the mid-cap and small-cap exposure stands at 16.4 per cent and 6.25 per cent respectively.
• These numbers imply that in order to meet the requirements imposed by the SEBI circular, roughly Rs 40,000 crore will have to directed from these funds towards mid and small-cap firms.
• Multi-cap funds, especially the bigger ones, are largely geared towards large-cap companies and that finding liquid enough quality stocks in these segments will be challenging in the present circumstances.
• Considering this, it is possible that these schemes, rather than opting for rebalancing, will opt for one of the other options available.
• Multi-cap funds were created to provide the fund manager the freedom to move across stock classifications, depending on the opportunity presented.
• If they have gravitated towards large-caps it is because of the possibility of greater returns.
• If the pandemic is likely to lead to greater economic concentration, benefitting the bigger firms, then surely fund managers and their investors should have the flexibility to take advantage of these trends.
• This degree of control by the regulator is odd. It was an avoidable move, that only heightened market uncertainty.

Conclusion:

• SEBI circular on multi-cap funds was avoidable during these uncertain times.

Online Coaching for UPSC PRE Exam

E-Books Download for UPSC IAS Exams

General Studies Pre. Cum Mains Study Material

Prelims Questions:

Q.1)With reference to the first World Solar Technology Summit (WSTS), consider the following statements:
1. The first World Solar Technology Summit (WSTS) is being organized by the International Solar Alliance (ISA) on 8th September, 2020.
2. ISA’s technology journal, Solar Compass 360 will also be launched during the summit.

Which of the statements given above is/are correct?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2

Answer:   C

Mains Questions:

Q.1)Define large cap, mid cap and small cap in Indian financial market.