Markets

Regulator may restrict MFinvestments to listed firms

Mumbai | Updated on August 08, 2019 Published on August 08, 2019

SEBI may restrict mutual fund investments in India to listed companies, sources close to the matter said. This is after it came to light that MFs had invested in debt instruments of unlisted companies and even entered into private agreements, which SEBI has viewed as unacceptable.

“SEBI wants MFs to shift all their investments to listed or to-be-listed equity and debt securities in a phased manner. It also wants them to reduce their exposure to unrated debt instruments from 25 per cent to only 5 per cent. Exposure to risky debt securities has emerged as a major risk for capital market investors, including those coming through the mutual fund space, and the regulator has been making efforts to enhance its regulatory safety net against such risks,” sources said.

Board meeting

Taking forward certain decisions approved by the SEBI board earlier in June, the regulator has now finalised the draft amendments to the prudential norms for mutual fund schemes for investment in debt and money market instruments, which may be announced in the next board meeting, the sources said.

Besides, some further amendments have been proposed for approval of the regulator’s board at its next meeting later this month, officials said. A key fresh proposal is to reduce the existing overall limit for investment of mutual fund schemes in unrated debt instruments, except those for which specific norms are separately provided, from 25 per cent to 5 per cent.

Further, the existing provision of the single issuer limit of 10 per cent for investment in unrated debt instruments has been proposed to be dispensed with, an official said. However, the official said these proposed limits may need to be reviewed periodically by the market watchdog after taking into account the market dynamics and participation of mutual funds in unrated debt securities from time to time. Among other decisions which have been in-principle already approved by the SEBI board and need to be incorporated in the amended regulations are: the valuation of debt and money market instruments based on amortisation would be dispensed with and would shift completely to mark-to-market valuation with effect from April 1, 2020.

Also, mutual funds would be permitted to accept upfront fees which would be issued by the industry body — the Association of Mutual Funds in India — in consultation with SEBI.

Under the new proposed prudential framework, mutual funds would invest only in listed or to-be-listed equity shares and debt securities (including commercial papers) and this would be implemented in a phased manner.

Circular

SEBI would soon issue a circular on operational aspects of the proposal such as timelines, grandfathering of existing investments, exclusion of exposure in debt instruments such as interest rate swaps, etc. The existing regulations allow a mutual fund scheme to invest a maximum of 10 per cent of its net asset value in unrated debt instruments issued by a single issuer while the total investment in such instruments is capped at 25 per cent.

However, pursuant to the SEBI decision to allow mutual funds to invest only in listed securities, very limited number of instruments that are unrated would be eligible for investment by mutual funds, as all listed debt instruments are mandatorily rated, after excluding debentures, government securities, interest rate swaps, interest rate futures, repo on corporate bonds, units of REITs/InvITs, etc.

SEBI is of the view that the existing limit of 25 per cent for investment in unrated debt instruments would be too high as the residual investment permitted in this category might be relevant only to a few instruments, including BRDS.

Published on August 08, 2019
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