MFs may have to limit exposure to 10% due to Sebi’s risk cap rule - Times of India

MFs may have to limit exposure to 10% due to Sebi’s risk cap rule – Times of India


MUMBAI: Fund managers of several equity mutual fund (MF) schemes may have to offload part of their stakes in the combined HDFC Bank once the merger is complete. As an alternative, they may rejig their holdings in HDFC and HDFC Bank in such a way that, after the merger, the total exposure to the new entity is less than 10%, according to market players and securities lawyers.
Currently, under markets regulator Sebi’s rules, a fund manager can invest up to 10% of the scheme’s total portfolio value in a single stock. This rule is aimed at limiting the concentration risk in the overall portfolio of an MF scheme. However, such a limit is not applicable to exchange-traded funds, index funds and thematic funds.
Currently, HDFC and HDFC Bank are among the most held stocks by almost all the equity fund managers that include MFs, other domestic institutional investors and foreign investors. A look at the holdings data of some of the top MF schemes in India showed that in a large number of them, the combined holdings in the two stocks exceed Sebi’s 10% threshold.
“That’s a real concern,” said a leading securities lawyer. “Given that both the stocks are blue chips and among the most sought after by fund managers and investors, ultimately it’s the investors who may be hit by the merger and the subsequent reduction in the holdings by funds.” The lawyer feels that AMFI should approach Sebi to relax the 10% concentration rule, which would most likely be beneficial to investors.
HDFC and HDFC Bank on Monday said that the merger would take up to 18 months to complete. In case Sebi declines to relax its concentration risk for the combined entity, fund managers will have at least one and half years to change their portfolio structure to bring their schemes’ holdings in line with the regulation, MF industry officials said.
“We will have to play it as it comes,” said a top equity fund manager with high exposure to both the stocks. In the recent past, about two years ago when Reliance Industries was outperforming most other stocks, some of the fund managers had faced a similar situation with its weight suddenly increasing beyond 10%. Industry body Amfi and some of the funds had approached Sebi to look into its concentration risk rule. However, other blue-chips had also rallied and RIL’s weight had come down to within the regulatory limit, a fund manager pointed out.


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