Side-pocketing in MFs to save retail investors from adverse effects: Radhika Gupta, Edelweiss AMC

By side-pocketing it, you cordon the problem to one side and the rest of the assets continue as normal, Radhika Gupta, CEO, Edelweiss AMC, tells ET Now.

Edited excerpts:

How are you reading into the Sebi announcement giving relief to MFs from piling on distressed assets?

It is a very good announcement on expected lines as provides relief and necessary measure for the MF industry. As the credit fund industry develops, more cases of downgrades and defaults are likely. So having the possibility of side-pocketing ensures that the scheme can continue as normal and saves retail investors from adverse effects.


How much of a relief would this be for MFs? What has been the process so far and how does it ease the way for managing the funds?

The details of the circular are yet to come out. Whether it is prospective or retrospective, in the past there was no provision for any kind of side pocketing. When an asset went bust, redemptions would start coming into the scheme. Usually institutional investors had first right. The scheme would take an advanced write-down and as further redemptions happened, that particular asset was more and more concentrated and became a larger part of the scheme.

It is not particularly healthy for anybody. By side-pocketing it, you cordon the problem to one side and the rest of the assets continue as normal.

From a risk management perspective, this segregation would not allow fund managers to take more risk because now if an asset goes wrong, it can be parked somewhere else and you would continue the operation as it is!

I do not think so. From what I understand of Sebi, when the details come out, side pocketing will be allowed in very sharp cases, in cases of so extreme downgrades in a short period of time. They will probably also limit the number of times that you can allow side pockets. At least, that is my guess. I do not think any fund management company would want to do side pockets. It does not reflect particularly well on the scheme to do on a recurring basis.

Even if the regulatory framework allows it, nobody would want to do this on a recurring basis. The regulator will not give you that much room when the final details come out.

HFCs with over Rs 500-crore asset size are exempted from disclosures, Could you throw more light on this aspect?

There is nothing specific to say. Since they are large sized HFCs, it has been under debate for a while and does not come across as a particular surprise.