This article says that SEBI is reluctant to provide rules for creation of side pockets.
“A side pocket is used by fund managers to separate stressed or risky assets from other investments and cash holdings. Fund houses create side pockets to ensure that while a proportion of investor money (in the scheme) linked to stressed assets gets locked until the fund recovers dues from a stressed company, investors are free to redeem the rest of their money if they choose to.”
The rational is that allowing isolation of risky assets from the rest fund would encourage fund managers to to take on more risk.
“Sebi is of the view that mandating the creation of a side pocket, to minimize the redemption pressure on the entire fund arising from their exposure to any particular company, could lead to some fund managers taking unnecessary risks,” said the chief executive officer of a large fund house, requesting anonymity. ”
However lack of rules can also lead to chaos and confusion among the mutual fund managers. Recently when Amtek Auto was downgraded JP Morgan had restricted redemption of Mutual Fund units and created a side pocket to isolate Amtek Auto from the rest of the portfolio.