The assessment of any default will have to be done on a case-to-case basis to assess whether it was solely due to the lockdown or loan moratorium.
The Securities and Exchange Board of India (Sebi) said on Thursday that money market or debt securities held by mutual funds (MFs) would not be classified as default, if payment of interest or principal was impacted due to Covid-19 pandemic or or the moratorium by the Reserve Bank of India (RBI).
The changes announced by the markets regulator shall be in force till the period of moratorium is permitted by the RBI. The move may help avoid any sharp movement in the value of securities in the near term and, thereby, prevent swings in the net asset values of debt schemes. What this means is that if companies that have issued debentures or bonds either defer payment or default due to the pandemic or moratorium granted by RBI, then the MF will not have to mark down these securities as is the practice.
The regulator said in its circular, “Based on the assessment if the valuations agencies appointed by the Amfi are of the view that delay in payment of interest, principal or extension of maturity by issuer is due to the lockdown or the moratorium permitted by RBI creating temporary operational challenges in servicing debt, then valuation agencies may not consider the same as a default for the purpose of valuation of money market or debt securities held by MFs.”
The assessment of any default will have to be done on a case-to-case basis to assess whether it was solely due to the lockdown or loan moratorium. On March 27, RBI had granted a moratorium of three months on payment of all instalments falling due between March 1, 2020 and May 31, 2020. “With this announcement, difficulty in payouts on account of moratorium or lockdown will not have adverse effect on valuations,” said Jimmy Patel, MD and CEO at Quantum AMC. However, some other MFs are of the view that the valuation agencies, which are subsidiaries of rating agencies, are not equipped to assess credit as it is not their domain. Also, asset management companies are of the view that it would be rather tough to establish a default that was purely due to Covid-19 pandemic.
While it may be easy to do so in case of some micro-finance institutions, it may not be true for all others. Under the current regulations, a money market or debt security shall be classified as “Default” if the interest or principal amount has not been received on the due date or when such security has been downgraded to “Default” grade by a credit rating agencies. However, in the same circular market regulator also mentioned that as per the principles of fair valuation, asset management companies shall continue to be responsible for true and fairness of valuation of securities. Officials in the MF industry say that even now fund houses can mark down their investments in specific debt securities if there is delay in payment of interest or principal amount by the debt issuer.