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CS Professional · IFSCA - Regulations, Listing and Compliances · Fund Management Services

A Fund Management Entity in GIFT IFSC launches a scheme whose placement memorandum states that it will invest only in listed equity shares of Asian companies. Midway through the year, the manager proposes to put 40% of the corpus into commodity derivatives because it expects higher returns. What is the correct position?

The shift is not allowed on the manager's own discretion. The scheme must invest according to the investment objective and strategy disclosed in its placement memorandum. Moving 40% into commodity derivatives departs from that, so it needs a valid alteration of terms with the required investor approval.

  1. AThe change is permitted because the manager has discretion over asset allocation at all times
  2. BThe change is permitted if the manager informs investors in the next annual report
  3. CThe change is not permitted unless it is consistent with the disclosed investment objective and strategy, or the offer terms are validly altered with the required investor approvalCorrect
  4. DThe change is permitted if the scheme's net asset value has risen in the previous quarter

Explanation

A fund must invest in line with the objective, strategy and restrictions disclosed in its placement memorandum. A shift to a different asset class is a departure from those terms. It needs a valid alteration with investor approval, not a mere later intimation. Option B is wrong because after-the-fact reporting does not cure a breach of the disclosed terms.

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