Mutual Funds

MFs can go for unlisted NCDs, again

Dhuraivel Gunasekaran | Updated on August 25, 2019

SEBI relaxes norm for investment in unlisted non-convertible debentures

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.

Published on August 25, 2019

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