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Business News/ Market / Stock-market-news/  Sebi to introduce investment cap for debt MFs
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Sebi to introduce investment cap for debt MFs

Move comes to mitigate excessive credit risks and prevent investors from losing money if the bond turns illiquid

The move, indicated by Sebi chairman U.K. Sinha, aims to prevent crises such as the recent one in two fixed income schemes under JP Morgan Asset Management (India) Pvt. Ltd. Photo: HTPremium
The move, indicated by Sebi chairman U.K. Sinha, aims to prevent crises such as the recent one in two fixed income schemes under JP Morgan Asset Management (India) Pvt. Ltd. Photo: HT

Mumbai: The Securities and Exchange Board of India (Sebi) is likely to introduce a sectoral cap and a single-company exposure limit for investments in corporate bonds by fixed income mutual fund (MF) schemes to mitigate excessive credit risks and prevent investors from losing money if the underlying bond turns illiquid.

“We are working on investment exposure norms for mutual funds. There could be some sort of sectoral cap or single-company investment limit (in terms of bonds). The new norms will be announced soon," U.K. Sinha, chairman, Sebi, said on Friday on the sidelines of an event.

The move, indicated by Sinha, aims to prevent crises such as the recent one in two fixed income schemes under JP Morgan Asset Management (India) Pvt. Ltd.

At present, a mutual fund scheme can invest up to 15% in debt papers issued by a single company.

Referring to the JPMorgan crisis, which followed a rating downgrade in its underlying bonds and a consequent erosion in the net asset values of the schemes, Sinha said the mutual fund industry was possibly not careful while managing debt schemes and there are certain areas in credit rating norms that need to be addressed.

“Mutual funds did not exercise adequate caution while investing," Sinha said. Also, Sinha said credit rating agencies cannot suddenly suspend ratings of a company’s bonds without appropriate and prior intimation. He urged more clarity and better disclosures on the ratings rationale.

“One day, the credit rating agency maintains a high investment grade for a given paper, and suddenly the rating is downgraded. Is it because the company didn’t pay the credit rating agency or is it something more serious? Such processes need to be more streamlined and rating agencies must enable investors to take informed investment decisions," Sinha said.

Earlier in October, the capital market regulator had asked asset management companies (AMCs) to stop depending entirely on credit rating agencies to assess corporate bond investments in their portfolios.

At a meeting between officials of Sebi and lobby group Association of Mutual Funds in India, the regulator asked MFs to develop internal credit appraisal systems to reduce the reliance on rating agencies, according to an October report in Mint.

Rating agencies have been criticized for sharp and sudden downgrades of corporate debt, which led to a hit on the fixed income portfolio of MFs. For instance, a downgrade of Amtek Auto Ltd bonds led to a redemption crisis at JPMorgan AMC.

Following such instances, the market watchdog warned AMCs to avoid taking undue credit risks by investing in debt papers of companies that are saddled with loans and could face potential rating downgrades.

Fixed income securities worth 4,000 crore held by AMCs at the end of July were downgraded, according to data shared by Sebi with AMCs in October. In August end, this number went up sharply to 13,000 crore, showed Sebi data.

There were 44 MF houses in India managing assets worth 13.24 trillion at the end of October. The assets of credit opportunities funds, which face the maximum risk from downgrades to corporate bonds, stood at 67,622 crore at the end of August, according to Crisil Ltd, a rating agency.

In September, Sebi had asked AMCs to explain the rationale behind their corporate bond investments, as it sought to avoid a redemption crisis similar to the one faced by JPMorgan AMC. Two schemes of the fund were hit because of a 193 crore exposure to bonds of Amtek Auto, which were downgraded by rating agencies because of the company’s deteriorating financial situation.

The AMC was forced to restrict redemptions from the two schemes. However, last week JPMorgan split units in these schemes into two: one for Amtek Auto securities, the other for all its other investments.

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ABOUT THE AUTHOR
Anirudh Laskar
Anirudh reports on significant corporate matters including large mergers and acquisitions, India's emerging e-commerce sector and regulatory issues in the corporate and financial services industry. Over the past 17 years, he has covered many beats including banking, NBFCs, aviation, automobile, insurance, markets, SEBI, IRDAI, mutual funds, investment banking, private equity, deals, and conglomerates.
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Published: 27 Nov 2015, 09:15 PM IST
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