In its recent informal guidance (“Guidance”) issued in response to a request made by Mirae Asset Management (“Applicant”), SEBI clarified the applicable Net Asset Value (“NAV”) where a switch is made from a liquid/overnight scheme to a non-liquid/equity scheme on a Friday (or any other day preceding a non-business day). A switch transaction is two-pronged and involves a ‘switch out’ from a scheme (in this case, liquid/ overnight scheme) and a ‘switch in’ to another scheme (in this case, non-liquid/ equity scheme).
Previously, for switch out transactions, the Applicant had treated the NAV as on Sunday (or the day immediately preceding the next business day) as the applicable NAV. For switch in transactions on the other hand, the Applicant treated the NAV as on the date of application to be the applicable NAV in case the value of such transaction was lower than Rs. 2 lakhs. However, when the value was higher than Rs. 2 lakhs, the Applicant treated the NAV as on the day on which funds became available for utilization as the applicable NAV.
In its request for guidance, the Applicant had sought clarity on two questions, particularly in light of the SEBI circular dated September 17, 2020 (“September 17th Circular”). First, the correct applicable NAV for the switch out and the switch in transactions forming part of the switch transaction from a liquid/overnight scheme to a non-liquid/equity scheme on a Friday (or any other day preceding a non-business day) for a value less than Rs. 2 lakhs. Second, the correct applicable NAV for the switch out and the switch in transaction, in a similar fact scenario where the value is more than Rs. 2 lakhs.
The Applicant had grounded the value-based distinction on SEBI circular dated September 13, 2012. However, in its Guidance, SEBI noted that such value-based distinction had been done away with, by the September 17th Circular and clarified that the correct applicable NAV would be identical, irrespective of the value.
With regard to the switch-out transaction, SEBI placed reliance on its Master Circular dated August 24, 2020 (“Master Circular”). SEBI noted that the applicable NAV of a liquid scheme for which an application is received on Friday (or any other day preceding a non-business day), would be the closing NAV as on the day immediately preceding the next business day. This would mean, for instance, that where Monday is not a holiday, the applicable NAV would be that as on Sunday.
Similarly, with regard to the switch-in transaction, SEBI placed reliance on the September 17th Circular and noted that the applicable NAV shall be the NAV as on the day on which the funds are first made available for utilisation in the non-liquid/equity scheme. However, as the switch out transaction is only completed on the day preceding the next business day, the funds can be first made available for utilisation only on that day. Thus, the applicable NAV for the transferee equity/non-liquid scheme would be the closing NAV on the day preceding the next business day, viz. Sunday, if the application is made on Friday and the upcoming Monday is not a holiday.
This Guidance serves to further the objective of the September 17th Circular, i.e. to uniformalise the applicable NAV across various schemes upon realisation of funds regardless of the value of the application, and thus reducing uncertainty and ensuring consistency in investors’ dealings with mutual funds.
