Sebi makes the right move for mutual funds

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Published: July 1, 2019 12:44:20 AM

Through a series of measures, SEBI has made sure fund managers of liquid schemes have enough liquidity and that they are not overexposed to HFCs and the real estate sector.

SEBI, mutual funds, mutual funds investment, small investors, Savings, opinion newsMoreover, there is a 5% prudential cap on the exposure to a particular group, much like there is for banks. (Reuters)

Even if it is somewhat late in the day, it is good that SEBI is tightening the rules for mutual funds (MFs), especially debt-oriented schemes; the ecosystem will be all the better for this. The fact is, MFs are dealing with the savings of small investors and, while there are no guarantees, fund managers must nonetheless treat this money with due respect. Unfortunately, in an attempt to perform better, some of them have taken undue risks, investing in companies that are clearly not credit-worthy. Through a series of measures, SEBI has made sure fund managers of liquid schemes have enough liquidity and that they are not overexposed to HFCs and the real estate sector. With the sectoral cap now at 20%, the overxposure to NBFCs, too, has been addressed. Moreover, there is a 5% prudential cap on the exposure to a particular group, much like there is for banks.

Crucially, the regulator has mandated that the schemes invest only in listed NCDs and CP. Most NCDs are, in any case, listed, but CPs are not; so, this is a good step. Given the rather primitive state of corporate governance in most companies today, one can never be too careful. The spate of downgrades over the past couple of months—including that of Piramal Capital, Sadbhav Engineering and Edelweiss Financial—is clear evidence of stress, both in the financial and non-financial sectors. Which is why, it is important to have enough of a cushion for exposure to debt securities that are credit-enhanced or backed by equities. SEBI has mandated a cover of four times, which seems sufficient.

The practice of pledging shares without making adequate disclosures has disrupted the system, and had SEBI not strengthened the disclosure requirements, companies may have continued to fool investors and lenders by resorting to unlawful methods to camouflage the true extent of shares pledged. From now on, promoters need to disclose the reasons for an encumbrance if it exceeds 20% of the equity capital, which seems like a reasonable threshold.

The fact is, both ratings agencies and lenders have been very slow to red flag default risks in companies; else, even a year ago, it was evident Jet Airways is in big trouble. Now that SEBI has banned MFs from entering into standstill agreements with borrowers, fund managers will be a lot more choosy. Given they manage small investors’ money, MFs have no business to be funding weak promoters.They need to be investing rather than lending, and even if the returns come down as a result, investors would not mind because their capital would be less at risk. It is a good move to have all money market instruments marked-to-market so that the schemes reflect the true net asset value and investors are not left guessing.

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