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The Securities and Exchange Board of India (SEBI), in its board meeting held last Wednesday, relaxed the investment norm that prohibited mutual fund schemes from investing in unlisted non-convertible debentures (NCDs). According to a press release, mutual fund schemes can now hold unlisted NCDs in up to a maximum of 10 per cent of their debt portfolio.
Earlier in June, following instances of credit-quality downgrades and defaults in the bond market that hit debt fund investors heavily, the market regulator came out with a list of changes to make MF investments more safer.
One of the amendments put an end to MFs’ investment in unlisted NCDs.
Over the past 12-15 months, MFs’ exposure to risky debt instruments has resulted in a drop in the NAV (net asset value) of many debt funds, including liquid funds, which in turn impacted the investors’ capital. SEBI has come out with a slew of measures to address the issue.
According to an industry source, about 10 per cent of MF debt portfolio is currently parked in unlisted NCDs. SEBI has now provided a leeway to invest in such unlisted NCDs which should have a simple structure to offer monthly coupons and be rated by agencies. This will be implemented in a phased manner by June 2020.
Dwijendra Srivastava, CIO - Debt, Sundaram Mutual Fund, believes: “The regulator might have found merit in tapping such opportunity in the unlisted space as there are many large bluechip companies — especially holding companies — whose debt instruments have not been listed in the exchanges due to other reasons.
“Many of the privately placed NCDs and pass-through certificates (PTCs) in the market are unlisted currently. This is an enabling clause, and individual AMCs may decide to use it if they find merit and want to park a part of their debt portfolio in such unlisted NCDs. Mutual funds are waiting for the final circular on this from SEBI.”
Our back-of-the-envelope calculation shows that some debt schemes from leading AMCs hold 25-30 per cent of their assets in unlisted NCDs. The deadline of June 2020 seems to be short as many of such holdings have a residual maturity of more than a year.
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