Sebi tightens exposure norms for mutual funds

By: | Published: January 12, 2016 12:20 AM

To bring in further diversification and discipline in debt portfolio of mutual funds (MFs), market regulator Securities & Exchange Board of India...

To bring in further diversification and discipline in debt portfolio of mutual funds (MFs), market regulator Securities & Exchange Board of India (Sebi) on Monday put limits on investments into single issuer and reduced exposure limit to a single sector.

The Sebi board said in a press release that the single issuer limit for debt funds has been reduced to 10% of net asset value (NAV) extendable to 12% of NAV after trustee approval, and trimmed the exposure limit to a single sector from 30% of NAV to 25% of NAV.

Dwijendra Srivastava, CIO – debt, Sundaram Asset Management Company (AMC), said, “These are the welcome steps which will provide mutual funds investors with enhanced diversification benefits. Having said that, there might be some issues when the issuances of the debt papers will be less.”

Officials added that these rules will ensure that each and every debt funds has at least nine-ten papers in their portfolio which will bring more diversification.

Currently, regulations restrict investment in rated investment-grade debt instruments issued by a single issuer to 15% of the NAV of the scheme. Officials in the mutual fund industry stated that new norms are in line with the expectations from the industry.

The issue of reducing the MF exposure limit for debt schemes caught Sebi’s attention after JP Morgan Mutual Fund got into troubles due to its exposure to debt securities of Amtek Auto. Earlier, JP Morgan Mutual Fund had restricted redemption from two of its debt schemes — Short Term Income Fund and India Treasury Fund.

The move came in the wake of a decline in NAVs of the schemes due to fund house’s exposure to Amtek Auto’s debt papers. These schemes had a collective exposure of about R200 crore in Amtek Auto.

The board also reduced additional exposure limit provided for housing finance companies (HFCs) in the finance sector from 10% of NAV to 5% of NAV.  To mitigate risks arising on account of high levels of exposure in the wake of events pertaining to credit downgrades, Sebi also introduced group level limits (which include an entity, its subsidiaries, fellow subsidiaries, its holding company and its associates) for debt schemes through issuance of appropriate circular and fixed the ceiling at 20% of NAV extendable to 25% of NAV after trustee approval. All public sector undertakings, PFI and PSU banks will, however, be excluded from group level limits.

Sebi also said trustee should be satisfied on the levels of exposure and confirm the same to the regulator in the half-yearly trustee report. The aforesaid investment restriction shall be applicable to all fresh investments by a new scheme or an existing scheme. The regulator would give fund houses time to comply with investments restrictions.

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