Debt paper: Rule change likely for MF investment

Sebi perusing Amfi panel report on this, likely to set investment cap

The Securities and Exchange Board of India (Sebi) will soon introduce new norms governing investment by mutual funds (MFs) in rated debt instruments.

The regulator might change the investment limit in a single issuer to less than 15 per cent, depending on the rating associated with the paper. For example, in the case of an AAA-rated paper, the investment cap could be left unchanged at 15 per cent, for AA-rated paper at 12 per cent and so on. At present, Sebi restricts investment in rated investment-grade debt instruments issued by a single issuer to 15 per cent of the net assets of the scheme.

“The lower the rating, the lower should be the exposure to the paper,” said a member of the valuation committee set up Association of Mutual Funds in India (Amfi), on condition of anonymity. The markets regulator is likely to come out with new investment norms in debt papers soon, based on the recommendations of this committee. “Larger funds will not get impacted but smaller ones might face a problem in constructing a portfolio, as their choice of investment papers will be restricted,” said Manoj Nagpal, chief executive, Outlook Asia Capital, adding fund houses could get up to a year to comply with the new norms for existing assets.

Around Rs 1 lakh crore of NFs’ assets under management (AUM) are exposed to papers where the credit risk is perceived to be high, say sources in the sector. The valuation panel wants all fund houses to have their own credit evaluation teams, instead of relying on external rating agencies for assessing a debt paper.

On Friday, Sebi chairman U K Sinha reiterated that MFs had not done enough research while investing in debt paper, being over-reliant on rating agencies. “We are likely to come out with more guidelines on sectoral, as well as company-specific, exposures,” he told reporters at the sidelines of a conference. “We have advised MFs that instead of relying completely on credit rating agencies, they must have their own system of risk assessment.”

According to an Amfi official, while the sector had key risk assessment procedures, recent events necessitated more. “We have submitted our valuation recommendations and risk assessment practices, and expect the regulator to take a call on these shortly,” he said.

He was alluding to the recent panic caused among the debt investors of JPMorgan MF, which had an exposure of nearly Rs 190 crore to Amtek Auto through two of its debt schemes. The automobile components maker defaulted on its repayment obligation in September. The ensuing panic reportedly triggered redemptions worth about Rs 10,000 crore from the debt schemes of Franklin Templeton MF.

Meanwhile, the issue of upfront commission was taken up again at an Amfi board meeting on Tuesday. Not all fund houses are complying with Amfi’s 100-basis point cap on upfront commission. While four or five asset management companies (AMCs) have defied the cap guidelines openly, several are flouting these covertly, said sector officials. “There has to be a consensus among the members about this. Sebi has informally made it clear that it wants the best practices’ guidelines on upfront commission to be complied with in both letter and spirit,” said the head of a fund house.

Earlier this year, Amfi had sent a proposal to all fund houses to cap the upfront commission at 100 bps. It had asked AMCs not to pay upfront the trail commission, as was the case in many of closed-end equity schemes.

REJIGGING RATING NORMS

• Investment limit in a single issuer to be changed to less than 15%, depending on the rating of the paper
   
• At present, Sebi restricts investment in rated investment grade debt instruments issued by a single issuer to 15 per cent of the scheme's NAV
   
• About Rs 1 lakh crore of mutual funds’ assets under management exposed to papers perceived to be high risk
   
• Sebi wants mutual funds to stop relying on credit rating agencies, build own risk assessment system
   
• Sebi asks fund houses to follow best practices guidelines on upfront commission