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SEBI Chief tells Mutual Funds to adhere to New Rules on debt investments 

Bloomberg Quint , Sep 26, 2019

After tightening rules on debt investments by mutual funds, the Securities and Exchange Board of India reiterated that asset managers need to follow the new framework on extension of repayment deadlines.

Any extension in maturity of a debt instrument held by mutual funds will be considered a default, according to the new guidelines released earlier this week by SEBI. And fund houses will have to report any changes that could impact valuations of schemes.

“Standstill agreements are not covered in any of the mutual fund regulations and we have made our position clear,” SEBI Chairman Ajay Tyagi said on the sidelines of industry lobby FICCI’s 16th Capital Market Summit. “Entities have to follow the regulations that are there. There is no confusion in that.”

Asset managers agreed to a standstill on sale of shares offered as collateral and repayment of debt by Essel Group and Anil Ambani’s Reliance Group as they struggled to repay on time. While SEBI frowned upon the practice, mutual funds agreed to give Subhash Chandra’s Essel Group more time after it repaid half the obligations due by September-end.

The new SEBI mutual fund norms plug the grey area. The capital markets regulator requires the mutual funds to adhere to the following conditions:
  • Any changes in terms of investments which may have an impact on valuation of securities need to be reported to the valuation agencies immediately;
  • Any extension of maturity of a money-market or debt security held by mutual funds shall result in security being treated as default;
  • If the maturity of any security is shortened and then subsequently extended, it will be considered a default;
  • Put options inserted after issuance of security shall not be considered for the purpose of valuation and original terms will continue.
What that means is irrespective of whether mutual fund schemes are closed- or open-ended, a change in tenure of a debt instrument will be considered a default and asset managers will have to mark down the net asset value.

The change could also force mutual funds to side-pocket—or segregate illiquid assets—on default.

HDFC Mutual Fund extended the tenure of some of its fixed-maturity schemes as it had agreed to a standstill. India’s largest asset manager later transferred the instruments to its book at fair value to protect unit holders.

Kotak Mutual Fund, however, closed its fixed-maturity schemes in April-May but promised investors to pay up the outstanding amount with interest by September end. The fund house sold shares of Zee Entertainment Enterprises Ltd., offered by Essel Group as a collateral, earlier this week to honour its commitment.

Aditya Birla Sun LIfe Mutual Fund, HDFC Mutual Fund and ICICI Prudential Mutual Fund have fixed maturity plans with exposure to Essel Group debt, according to Morningstar data available at the end of August. The group paid mutual funds from the proceed of a stake sale in Zee Entertainment to Invesco Oppenheimer. Updated data on mutual funds investment in Essel Group schemes is not available yet.

 

 

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