Sebi wants MFs to invest only in listed securities; exposure to unqualified debt will be limited to 5 pcs

New Delhi, August 8 () In order to protect investors from mutual funds from high-risk assets, the Sebi regulator wants fund houses to transfer all their investments to equity and debt securities gradually and reduce your exposure to unrated debt instruments from 25 percent to just 5 percent.

Exposure to risky debt securities has become a major risk for capital market investors, including those entering through the mutual fund space, and the regulator has been making efforts to improve its regulatory safety net against such risks

By carrying out certain decisions approved by the Sebi board in early June, the regulator has now finalized the draft amendments to the prudential rules for mutual fund schemes for debt investment and money market instruments.

In addition, some additional amendments have been proposed for the approval of the Sebi meeting at its next meeting later this month, authorities said.

A new key proposal is to reduce the existing general limit for the investment of mutual fund schemes in unskilled debt instruments, except those for which specific rules are provided separately, from 25 percent to 5 percent.

In addition, the existing provision of the single issuer limit of 10 percent for investment in unqualified debt instruments has been dispensed with, an official said.

However, the official said that these proposed limits can be periodically reviewed by Sebi after taking into account market dynamics and the participation of mutual funds in unrated debt securities from time to time.

Among other decisions that, in principle, have already been approved by the Sebi board of directors and must be incorporated into the modified regulations, debt valuation and money market instruments based on amortization would be dispensed with and completely changed to the market. valuation effective as of April 1, 2020.

In addition, mutual funds would be allowed to accept initial rates with the disclosure of such rates to the valuation agencies and the industry agency AMFI (Association of Mutual Funds in India) would issue a standard methodology for the treatment of such fees in consultation with Sebi.

Under the proposed new prudential framework, mutual funds would only invest in equities and debt securities (including commercial papers) and this would be implemented gradually.

Sebi will soon issue a circular on the operational aspects of the proposal, such as deadlines, payment of existing investments, exclusion of exposure in debt instruments such as interest rate swaps, etc.

Existing regulations allow a mutual fund scheme to invest a maximum of 10 percent of its net asset value in unqualified debt instruments issued by a single issuer, while the total investment in such instruments is limited to 25 percent.

However, in accordance with Sebi's decision to allow mutual funds to invest only in listed securities, a very limited number of instruments that are not qualified would be eligible for mutual fund investment, since all listed debt instruments They are necessarily qualified.

After excluding obligations, government securities, financial swaps of interest rates, interest rate futures, repos in G-Sec and T-Bills, investments of mutual funds in unqualified debt instruments are mainly in fixed deposits, re -discount of invoices (BRDS), mutual funds units, repos in corporate bonds, REIT/InvIT units (Real Estate Investment Trusts and Infrastructure), etc.

However, Sebi already has separate investment rules for fixed deposits (FD), mutual fund units, corporate bond repos and REIT/InvIT and exposure to these instruments is not part of the existing investment limit of 25 percent.

Excluding all these instruments, the total exposure of mutual funds in the remaining unqualified debt instruments is mainly in BRDS, which amounts to around Rs 2,870 million as of March 31, 2019.

In addition, this investment is limited to only four mutual fund schemes and the average value of the investments as a percentage of the assets under management of the respective scheme was only about 3 percent. As a result, Sebi believes that the existing 25 percent limit for investment in unqualified debt instruments would be too high since the residual investment allowed in this category could be relevant only for a few instruments, including the BRDS. BJ BJ HRS