Securities Exchange Board of India (SEBI) on Friday
extended the deadline to May 1 for implementation of the swing pricing mechanism,
for mutual fund schemes, aimed at discouraging large investors from sudden
redemptions, reported PTI.

New rules intended to ensure fairness in the treatment of
entering, exiting and existing investors in mutual fund schemes were to take
effect on March 1.

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SEBI said in a circular that it has extended the
implementation date of swing pricing mechanism provisions to May 1, 2022, based
on a request received from the Association of Mutual Funds in India (AMFI).

In September last year, the regulator introduced a swing
pricing mechanism for open-ended debt mutual fund schemes in an attempt to
discourage large investors from sudden redemptions. Initially, the new
framework will be applicable only for scenarios related to net outflows from
the schemes.

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It will be a hybrid framework with a partial swing during
normal times and a mandatory swing during market dislocation times for
high-risk open-ended debt schemes.

Swing pricing refers to a process of adjusting a fund’s
net asset value to reflect its net capital activity costs to its investors.

Quoted bid/ask spreads and overall trading costs can
widen in a liquidity-challenged environment, and may not represent the
execution prices that can be achieved in the market.

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During normal times, SEBI said that industry body AMFI
will prescribe broad parameters for the determination of thresholds for
triggering swing pricing which will be followed by asset management companies
(AMCs).

The industry body will prescribe a range of swing
thresholds for normal times.

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During normal times, SEBI said AMCs would decide on the
applicability of swing pricing and the quantum of swing factor based on
scheme-specific issues that need to be disclosed in the Scheme Information
Document (SID).

According to the regulator, Amfi will develop a set of
guidelines to help SEBI determine market dislocation.

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The regulator will determine ’market dislocation’ either
based on Amfi’s recommendation or suo moto. Following the declaration of market
dislocation, SEBI will notify the market that swing pricing will take effect
for a specified period.

The swing pricing framework will be mandated only for
high-risk open-ended debt schemes, as they carry higher risk securities than
other schemes.

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According to SEBI, all open-ended debt schemes (except
overnight funds, Gilt funds, and Gilt with 10-year maturity funds) will have to
include a mandatory swing factor provision in their offer documents within
three months.

The SEBI said both the incoming and outgoing investors
will get a net asset value (NAV) adjusted for the swing factor when the swing
pricing framework is implemented (for normal times or during market
dislocations).

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In the SIDs, all AMCs must provide clear disclosures,
along with illustrations, on how the swing pricing framework works, when it is
triggered, and the effect on NAVs for incoming and outgoing investors. In both
normal times and times of market dislocation, swing pricing will be applied to
all unitholders at the PAN level with a redemption cap of Rs 2 lakh for each
mutual fund scheme.

Trustees and boards of AMCs will have to approve policies
and procedures regarding swing pricing. Based on unswung NAV, the scheme
performance should be computed.

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AMCs should provide disclosures regarding adjusted NAV as
well as performance impact in their SIDs and scheme-wise annual reports and
abridged summaries, according to SEBI. Only if the swing pricing framework
applies to the mutual fund scheme may it be prominently displayed on their website.