Sebi may restrict debt Mutual Funds from investing in wilful defaulter firms

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Mumbai | Published: March 12, 2016 12:12:46 AM

The JSPL incident comes just a few months after JPMorgan AMC had suffered repercussions of downgrades of auto component maker Amtek Auto’s debt instruments

The Securities & Exchange Board of India (Sebi) is mulling to place restrictions on debt mutual funds from investing in companies which have been notified as wilful defaulters.

This will be part of Sebi’s regulations to check wilful defaulters from accessing capital markets to raise funds, sources told FE. The issue is on the agenda for the Sebi board meeting on March 12.

“After the new regulations, any companies that have been termed as wilful defaulters or companies which are promoted by wilful defaulters will not be able to raise any money through debt mutual funds. Further, after a company is reported as wilful defaulter, funds houses which have exposure to that particular company will have to disclose the size of  their exposure to the regulator,” an ex-Sebi official said on condition of anonymity, adding that the restrictions would not be applicable for equity mutual funds.

The initiative comes at a time when debt mutual funds have come under the scanner for offloading their exposures abruptly from the companies whose ratings were downgraded by credit agencies. The recent instance being that of  Franklin Templeton Investments which reduced its exposure to Jindal Steel and Power (JSPL). The firm completely sold its of around R1,588.8 in a span of three months. This was after credit agency CRISIL downgraded JSPL’s paper  to ‘CRISIL D/CRISIL D’ from ‘CRISIL BB+/CRISIL A4+’; the ratings have been removed from ‘Watch with Negative Implications’.

The JSPL incident comes just a few months after  JPMorgan Asset Management had suffered repercussions of downgrades of auto component maker Amtek Auto’s debt instruments.

This was followed by delay in repayment of debt to JPMorgan, which imposed restrictions on withdrawals by investors. After a wait, unitholders got back only 85% of the value of the segregated schemes that held Amtek bonds.

The new regulations are also expected to bar wilful defaulters from raising funds through fresh equity. However, the companies will be allowed to tap existing shareholders by way of rights issue and private placement or preferential allotment. These measures are in line with the proposals that the markets regulator had made in the discussion paper, ‘Imposing restrictions on wilful deaulters’, which was released in January 2015.

“The regulations are long due as we need to close the plugs for wilful defaulters. The RBI and the finance ministry have already taken a number of steps to check the menace of bad debts and wilful defaults. However, being a markets regulator, Sebi also needs to keep in mind the interests of smalltime shareholders. A complete freeze on capital raising can impact financials of a company which would in turn impact shareholders,” the ex-Sebi official said.

According to RBI guidelines, a borrower is termed a wilful defaulter if he defaults in meeting the repayment obligations to the lender even when he has the capacity to repay, or has not utilised the money from the lender for the specific purposes for which finance was availed and has diverted the funds for other purposes. An entity can also be declared wilful defaulter for misrepresentation or falsification of records, for disposal or removal of securities without bank’s knowledge and for fraudulent deals.

Stricter norms
* The regulations likely to be announced on March 12
* Wilful defaulters will not be able to raise any money through debt mutual funds
* After a company is labelled as wilful defaulter, funds houses which have invested in that particular company will have to disclose the size of  their exposure
* The regulations will not be applicable to equity mutual funds
* Sebi is unlikely to impose a complete freeze on capital raising of such companies as it would impact small time shareholders

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