{"id":11632,"date":"2019-05-07T11:12:00","date_gmt":"2019-05-07T11:12:00","guid":{"rendered":"https:\/\/trainingcentral.co.in\/?p=11632"},"modified":"2025-05-12T06:40:34","modified_gmt":"2025-05-12T06:40:34","slug":"no-takers-for-side-pocketing-despite-series-of-credit-events","status":"publish","type":"post","link":"https:\/\/trainingcentral.co.in\/portal\/no-takers-for-side-pocketing-despite-series-of-credit-events\/","title":{"rendered":"No Takers For Side-Pocketing Despite Series Of Credit Events"},"content":{"rendered":"\t\t
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It is not far off the mark to say that side-pocketing has mostly been side-pocketed by the MF industry.<\/p>\n\n\n\n

Post IL&FS crisis, SEBI issued a circular on \u2018creation of segregated portfolio in mutual fund schemes\u2019 popularly known as side-pocketing on December 28, 2018.<\/p>\n\n\n\n

Side-pocketing is a practice in which fund houses can segregate risky assets from the rest of their holdings and cap redemptions. Simply put, fund houses can create two funds \u2013 one with risky assets where the fund house will not allow redemption expecting recovery from stressed assets and another fund with other assets with existing features. This practice is quite common among hedge funds in developed markets.<\/p>\n\n\n\n

The advantage of such a practice is that as and when there is recovery from the bad asset, only the erstwhile investors who took the hit earlier are entitled to get the recovered amount if any.<\/p>\n\n\n\n

However, SEBI has kept it optional for fund houses. SEBI said, \u201cCreating segregated portfolio may be optional for mutual funds but approval of trustees is necessary for activating such a portfolio. It should be created only if the Scheme Information Document (SID) of the scheme has provisions for segregated portfolio with adequate disclosures.\u201d This essentially indicates that existing fund houses are required to make changes to their SID to avail of this facility. Also, fund houses will have to serve notices to unit-holders well in advance and offer an option to exit the fund without exit load.<\/p>\n\n\n\n

Let us see what has happened in the debt market post IL&FS. Two groups are facing difficulties in meeting obligations to mutual funds: (a) Essel group entities in the form of Loan against Security (LAS) exposure and (b) the recent event of Reliance Home and Reliance Commercial. To be noted, DHFL has not defaulted yet, they have only been downgraded. Remember, the use of side-pocketing is not compulsory, it is just an option to mitigate risk. The management of AMCs and trustees act in the best interest of unit-holders and if required, they will resort to side-pocketing.<\/p>\n\n\n\n

However, hardly any AMC has made changes to create a segregated portfolio through side-pocketing despite a series of credit events. For some reason, the management of AMCs are not in a position to consider this as an option.<\/p>\n\n\n\n

So what is holding them back? The possible reasons why AMCs are not interested in the concept of side-pocketing are:<\/p>\n\n\n\n