Side-pocketing framework for Indian debt mutual funds

Sat, 16 May 2026 00:00:00 +0000

The side-pocketing framework for Indian debt mutual funds is the SEBI regulatory mechanism, introduced through SEBI Circular SEBI/HO/IMD/DF2/CIR/P/2018/160 dated 28 December 2018, that permits asset management companies (AMCs) to separate distressed or defaulted debt securities from the rest of a mutual fund scheme’s portfolio into a distinct segregated portfolio, ring-fencing the credit event’s impact on the main portfolio and preventing the adverse selection dynamic of investors with knowledge of the distress redeeming first at the expense of remaining unit-holders. The framework was SEBI’s policy response to the September to October 2018 IL&FS group defaults, which had exposed a substantial gap in the Indian mutual fund regulatory framework: in the absence of a side-pocketing mechanism, AMCs faced an untenable choice between meeting redemptions by selling performing assets (concentrating the distressed exposure in the residual portfolio) and suspending redemptions (a more disruptive action under Regulation 39). The 2018 circular provides an intermediate mechanism that protects continuing investors while preserving the ability to recover from distressed holdings.

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Side-pocketing framework for Indian debt mutual funds