Under SEBI guidelines, under what strict conditions are 'Inter-Scheme Transfers' (ISTs) of securities permitted between two schemes of the same mutual fund?

[ A ]ISTs can be executed at arbitrary historical purchase prices to mask credit default losses.

[ B ]ISTs can only be executed on weekends when stock exchanges are closed.

[ C ]ISTs are strictly illegal under all circumstances in India.

[ D ]ISTs must be executed strictly at prevailing spot market prices, must conform to the investment objective of the receiving scheme, and can be done strictly for meeting redemption liquidity after exhausting cash and market borrowing avenues.[ CORRECT ]

Takeaway

Option D is correct: ISTs must be executed strictly at prevailing spot market prices, must conform to the investment objective of the receiving scheme, and can be done strictly for meeting redemption liquidity after exhausting cash and market borrowing avenues.

Derivation

Inter-Scheme Transfers let one scheme of an AMC sell securities to another scheme of the same fund house, but SEBI attaches three conditions to prevent misuse. First, execution must be at the prevailing spot market price, never at a stale or arbitrary cost that could offload an impaired security at an inflated value. Second, the security must fit the investment objective of the receiving scheme — a debt fund cannot become a dumping ground for equity holdings. Third, ISTs are permitted only as a liquidity tool of last resort, to meet redemption pressure, and only after the transferring scheme has exhausted its own cash balances and market borrowing avenues such as repo.

Why the others fail

A — ISTs can be executed at arbitrary historical purchase prices to mask credit default losses.

Executing transfers at arbitrary historical prices to disguise credit losses is exactly what SEBI's spot-market-price requirement is designed to prevent, not a permitted method.

B — ISTs can only be executed on weekends when stock exchanges are closed.

ISTs execute on regular business days during market hours at verifiable, transparent spot prices — they are not restricted to weekends when markets are shut.

C — ISTs are strictly illegal under all circumstances in India.

ISTs are legally permitted under strict SEBI conditions as a last-resort liquidity measure; they are not illegal, provided the price, objective-fit, and last-resort conditions are met.