This is expected to help diversify the portfolio of a debt fund. However, industry experts say in the current debt market scenario this might prove to be more restrictive. With hardly any good quality debt paper available, there is a tendency to concentrate in a few instruments. ``But in the long run when the markets acquire depth the new norms will help diversify the debt portfolio,'' said a fund manager.

However, this restriction shall not be made applicable to government securities and money market instruments.

At its first meeting today,the committee also recommended to Sebi that the restrictions on equity investments in a company be linked to the NAV of the schemes. Under the existing Regulations no mutual fund under all its schemes can own more than 10 per cent of any company's paid-up capital carrying voting rights. The committee recommended that this be restricted to 10 per cent of the NAV of a scheme in the equity shares or equity related instruments of a single company. However, the limit of 10 per cent will not be applicable for index funds and sector/industry specific scheme. In such cases, the limit shall be 10 per cent or the weight of the scrip in the index/sub-index of the sector whichever is higher subject to adequate disclosures in the offer document.

The committee has also recommended restrictions in investment in listed group companies. At present, a mutual fund can invest upto 25 per cent of the NAV of all of its schemes in the listed securities of group companies of the sponsor. This provision is liable to be misusedsince it is possible that the mutual fund can invest the entire NAV of any one of the scheme in the group companies and still be within the 25 per cent limit of all its schemes. Therefore, the committee recommended that the 25 per cent limit should be for NAV of each scheme separately and not for all the schemes of a mutual fund put together.

At present there is no restriction on the investments in unlisted securities except that no mutual fund shall make an investment in any unlisted security of an associate or group company of the sponsor. The committee recommended restriction of investments in unlisted shares to a maximum of 10 per cent of the NAV of a scheme in case of close-ended scheme and in case of open-ended schemes the limit may be made more stringent to 5 per cent of the NAV of the scheme as there is continuous repurchase by investors in such a scheme.

According to the present Regulation, the investments in debt instruments should be made only in rated instruments not below investment graderated by a credit rating agency. An exception to this is possible with the specific approval of the board of the AMC, the committee recommended that the investment of a scheme in unrated debt securities should not exceed 15 per cent of NAV of a scheme and this limit may be extended to 25 per cent provided the AMC gets the prior approval of the board of the AMC and board of trustes.

The committee has accepted the proposals made by mutual funds vis-a-vis changes in the structure of an open-ended scheme. Under the existing regulations in case of change in control and change in fundamental attributes, 3/4th of the unitholders' approval is required. Mutual funds have represented that this clause may be relaxed in the case of open-ended schemes as the unitholders have an exit option throughout the life of the scheme. If the investors do not agree to the changes proposed by the mutual fund they can exit at any time at the prevailing NAV. A precondition for such change may be that the unitholders should be informedby way of individual communication and through advertisements in the newspapers.

The committee has suggested that mutual funds disclose at the time of declaring half-yearly and yearly results any underwriting obligations undertaken by the schemes of the mutual funds with respect to issue of associate companies, devolvement, if any, subscription by the schemes in the issues lead managed by associate companies; subscription to any issue of equity or debt on private placement basis where the sponsor or its associate companies have acted as arranger/manager.