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SEBI tightens norms for MFs, bans standstill pacts

Our Bureau MUMBAI | Updated on June 27, 2019 Published on June 27, 2019

Promoters required to declare details on encumbrance every year

SEBI said on Thursday it will initiate action against mutual funds (MFs) if there are defaults in cases involving loans against shares to company promoters.

The MF industry is facing a crisis that has been attributed to fund managers lending to company promoters via debt schemes. The fund houses have also entered into ‘standstill’ agreements with promoters ‘to not sell the shares for a certain period even when default had been triggered’.

“SEBI does not approve or recognise any standstill agreement. We will initiate action (against the fund house) once there is a default,” SEBI Chairman Ajay Tyagi said at a press conference here after the regulator’s board meeting.

Tyagi further said that MFs are not banks, and they should therefore be investing and not lending. “There has to be more discipline and prudence in the industry to protect investors’ money,” he said.

So far, standstill agreements have affected the payout of the fixed maturity plans (FMPs) of Kotak Mahindra AMC and HDFC AMC. SEBI has initiated action against the two fund houses, regulatory officials said. One of the fund houses had even stalled redemptions in the affected schemes. Also, MFs recently agreed to not sell Essel Group promoters’ pledged shares till September. Also, an Anil Ambani group company had struck a standstill agreement with 90 per cent of its lenders.

Investment rules

SEBI today also approved stricter investments norms for MF houses. MF schemes can now invest only in listed debt or equity. The value at risk will be considered on a mark-to-market basis instead of the earlier practice of considering it on an amortisation basis. Also, MFs will have to provide four times the cover for investment in debt and it should also be backed by equity, SEBI said in a press release. Promoters have bypassed SEBI disclosure requirements related to pledged shares by giving it different names. SEBI is now seeking to put a lid on such promoter tactics.

BusinessLine had reported on June 23 that SEBI would issue norms on pledged shares.

“The term encumbrance (pledging) would include any restrictions on free and marketable title of shares, by whatever name called, whether directly or indirectly,” SEBI said. The regulator has asked promoters to declare to the audit committee details on encumbrance on a yearly basis and as and when they are initiated.

 

 

It said promoters, promoter groups and persons acting in concert will need to disclose the ‘reason’ for creating an encumbrance once 20 per cent of their share capital is leveraged. MF liquid schemes will have to hold at least 20 per cent of assets in cash and gilts. This will help them meet redemptions, it added.

DVR norms cleared

In a separate move, SEBI cleared new norms for differential voting rights (DVRs), allowing the listing of firms with some shareholders with superior voting right shares.

This will benefit tech companies and start-ups with asset-light business models. The promoter of a start-up is often key to its success, and may be required to retain control. Under SEBI norms, they can come out with a public issue and keep shares with superior voting rights with themselves.

 

Published on June 27, 2019
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