SEBI’s new rule on default of debt securities is another pressure point for MFs

Our Bureau Mumbai | Updated on September 26, 2019 Published on September 26, 2019

Any extension in the maturity of a money market or debt security will result in being treated as ‘default’, a SEBI circular says.

Market regulator SEBI’s new norm on valuation of debt securities could raise fresh concerns for mutual funds. It 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 markdown 75 per cent on secured exposures to securities that are downgraded to default grade or ‘D,’ as is the norm, experts said.

Simply, it means that if a debt security or a money market instrument is maturing on September 30, and an extension is given to the company for payback by the mutual fund, then such an instance 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 (the due date of maturity extended beyond the original date) 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 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.”

One of the large corporate house recently got an extension from a mutual fund with regard to repayment on its debt instruments that had matured earlier this year.

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Published on September 26, 2019
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