Sebi allows MFs to participate in repo corp debt securities

Market regulator the Securities and Exchange Board of India (Sebi) today allowed mutual funds to invest in repo, or short-term repurchase of forward contract, of corporate debt securities with a ceiling of 10% of the net assets of the concerned scheme.

"The gross exposure of any mutual fund scheme to repo transactions in corporate debt securities shall not be more than 10% of the net assets of the concerned scheme," the Sebi said in its guidelines on participation of MFs in repo in corporate debt securities.

In repo transactions, also known as a repo or sale repurchase agreement, securities are sold with the seller agreeing to buy them back at later date. The instrument is used for raising short-term capital.

The repurchase price should be greater than the original sale price, the difference effectively representing interest.

"The cumulative gross exposure through repo transactions in corporate debt securities along with equity, debt and derivatives shall not exceed 100% of the net assets of the concerned scheme," the RBI said, adding that MFs are allowed to participate in repo transactions only in 'AAA' rated corporate debt securities.

Besides, they can borrow through repo transactions only if the tenor of the transaction does not exceed a period of six months.

"The details of repo transactions of the schemes in corporate debt securities, including details of counterparties, amount involved and percentage of net value asset (NAV) shall be disclosed to investors in the half yearly portfolio statements and to Sebi in the half yearly trustee report," the regulator said.

To enable the investors in such schemes take an informed decision, MFs have been directed to give details in the scheme information document on the exposure limit for the scheme and the risk factors associated with repo transactions in corporate bonds, it added.