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FT impact: SEBI limits MFs’ debt pie

Suresh P Iyengar | Updated on March 11, 2021

Investment capped at 10%, disallows close-ended funds in perpetual bonds

Wiser after the Franklin Templeton crisis, market regulator SEBI has capped the mutual funds investment in debt instruments issued by single issuer at 10 per cent.

Mutual fund will not invest over 10 per cent of its NAV of the debt portfolio of the scheme in instruments with special features and not more than 5 per cent of its NAV of the debt portfolio in instruments issued by a single issuer, said SEBI on Wednesday.

Banning close-ended schemes from investing in perpetual bonds, SEBI said the maturity of all perpetual bonds will be treated as 100 years from the date of issuance for the purpose of valuation. The revised SEBI norms will come into effect from April 1.

Special features debts

Mutual funds invest in certain debt instruments with special features such as sub-ordination-to-equity and convertible-to-equity upon trigger of a pre-specified event for loss absorption. Additional tier-I and tier-II bonds issued under Basel III framework are instruments that have has the special features. The debt instruments having these special features referred as non-convertible debentures should be treated as debt instruments until converted to equity, said SEBI.

Most of the mutual funds had burned their fingers by investing in the additional tier-I bonds issued by YES Bank. As part of the bailout package, the RBI had written off the entire investment made in these AT-1 bonds, leaving investors in lurch. Investors had filed cases in the Bombay High Court which refused to stay the RBI decision.

The investments of mutual fund schemes in such instruments in excess of the limits will be grandfathered and such schemes shall not make any fresh investment in such instruments until the investment comes below the specified limits, said SEBI.

Segregated portfolio

Debt schemes that have investment in instruments with special features should have a provision for segregated portfolio and should be included in the Scheme Information Document, it said.

If the said instrument is to be written off or converted to equity pursuant to any proposal, the date of said proposal may be treated as the trigger date. However, if the said instruments are written off or converted to equity without proposal, the date of write off or conversion of debt instrument to equity may be treated as the trigger date, said SEBI.

AMCs may create segregated portfolio in scheme on the trigger date. Further, asset management companies/ valuation agencies shall ensure that the financial stress of the issuer and the capabilities of issuer to repay the dues/ borrowings are reflected in the valuation of the securities from the trigger date onwards, it added.

Published on March 10, 2021

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