SEBI diktat on valuation of debt securities may hurt fund houses

Our Bureau Mumbai | Updated on September 29, 2019 Published on September 29, 2019

Regulator’s new regulation needs clarity; option to roll over investment needed for highly-rated papers, say market participants

Capital market regulator SEBI’s new norm on valuation of debt securities could raise fresh concerns for mutual funds. The regulator has said that ‘any extension in the maturity of a money market or debt security will result in being treated as ‘default,’ for the purpose of valuation. This will force mutual funds to mark down 75 per cent on secured exposures to securities that are downgraded to default grade, experts said.

Simply put, if a debt security or money market instrument matures on September 30 and an extension is given to the company for paying back the money by the mutual fund, then it will be treated as a ‘default’ and the security will be valued accordingly, experts told BusinessLine.

“As per the SEBI circular, it seems very clear that any debt or money market instrument beyond maturity will be treated as default.

“All valuation matrix applicable or rules applicable to ‘default’ grade securities will apply to those being held beyond maturity,” said JN Gupta, founder, SES, a shareholder advisory and firm. Gupta has also worked as an executive director with SEBI earlier.

With regard to ‘default’ grade securities, SEBI has said that mutual funds will have to promptly inform the valuation agencies and credit rating agencies of “any instance of non-receipt of payment of interest and/ or principal amount (part or full) in any security.”

Extension to corporate

One of the large corporate houses was recently given an extension by an MF with regard to repayment on its debt instruments that had matured earlier this year.

Jimmy Patel, Managing Director & CEO, Quantum Asset Management Company, said the SEBI order needs some clarity and it should allow mutual funds to roll over investment in highly-rated quality papers. Based on the rating of the debt paper, he said SEBI can consider allowing a rollover.

Agreeing with Patel’s view, another mutual fund head said there are also cost implications when money is paid out on maturity by a good rated corporate and is again redeployed in the debt paper of the same corporate.

This entire process takes about a day and the interest for the day will be lost, he said.

This apart, he added there can be additional stamp duty implications if the investment is more than 89 days’ old.

Published on September 29, 2019
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