SEBI Tweaks Framework for Mutual Funds to Set Up Limited Purpose Clearing Corporation
The Securities and Exchange Board of India (SEBI) has revised its formula pertaining to contribution of asset management companies (AMCs) for setting up of limited purpose clearing corporation (LPCC) by mutual funds. SEBI says the contribution of AMCs will be now based on average assets under management (AUM) of debt-oriented schemes for financial year 2020-21.
Earlier in February, SEBI had issued guidelines where AMCs were required to contribute Rs150 crore as share capital for setting up of LPCC by mutual funds.
The guidelines ordained that such contribution from AMCs needs to be in proportion to the average AUM of open-ended debt oriented mutual fund schemes, excluding overnight, gilt fund and gilt fund with 10-year constant duration but including conservative hybrid schemes, managed by them for the financial year 2019-20.
This new modification comes in the wake of a representation from the Association of Mutual Funds in India (AMFI).
The LPCC is an entity constituted to undertake the activity of clearing and settlement of repo transactions. A working group set up by the mutual fund advisory committee of SEBI had earlier recommended that the mutual fund industry be allowed to set up LPCC. The committee felt that mutual funds would be natural beneficiaries of such a clearing corporation. The recommendation of setting up LPCC was also deliberated with various issuers of corporate bonds and in corporate bonds and securitization advisory committee.
It is part of a broader set of measures taken by SEBI to improve liquidity in the corporate debt market. In its board meeting held in September 2020, SEBI had approved a proposal to facilitate setting up of an LPCC.
Subsequently in February 2021, SEBI issued a circular saying "It has been decided that AMCs shall contribute Rs150 crore towards share capital of LPCC in proportion to the AUM of open ended debt oriented mutual fund schemes, excluding overnight, gilt fund and gilt fund with 10 year constant duration but including conservative hybrid schemes, managed by them".
AMFI has been tasked to calculate contribution per AMC based on the average AUM of debt-oriented schemes and inform the AMCs.
LPCC would help fund houses in tackling with redemption pressure and settle transactions in corporate bond markets. This gains importance more so in the aftermath of the crisis in six debt mutual funds of Franklin Templeton Asset Management in April 2020.