Sebi allows segregation of distressed assets by mutual funds

Provision will be optional for schemes taking credit risks in their debt exposures

The liquidity crisis triggered by the IL&FS default has led the Securities and Exchange Board of India (Sebi) to introduce the concept of segregated portfolio – a mechanism to separate distressed assets from the liquid part of a mutual fund scheme. This provision will be optional for the schemes taking credits risks in their various debt exposures.

“This provision has been triggered by the crisis at non-banking finance company (NBFCs). So, it is for the interest of retail investors that the toxic assets are segregated from the assets which are doing well. We think it is an appropriate time to introduce this provision,” said Ajay Tyagi, chairman of Sebi.

The Sebi at its board meeting on Wednesday also decided to issue a consultation paper on bringing uniformity in the valuation process of corporate bonds. The regulator will look into the issue of valuing distressed assets and other debt exposures of mutual fund schemes. The regulator said that it will prescribe guidelines for pricing of corporate bonds, which shall be followed uniformly across all the mutual funds.  

“Principally, we expect improvement in two areas. One is valuation of bonds and papers which have a residual maturity of less than 60 days also the paper which gets downgraded to below investment grade. The current guidelines are generic. So, we are looking to move towards crystalising the pricing guidelines,” said Madhabi Puri Buch, whole-time member of Sebi.

To make sure the provision of side-pocketing is not misused or doesn’t lead to any moral hazard, the regulator said it would soon come out with a circular giving clarity on the conditions under which the provision can be invoked.

Key decisions taken in the board meet

• Allows MFs to ring-fence distressed assets
   
• Relaxes norms to boost start-up listings
   
• FPI shareholding with common ownership or control to be clubbed 
   
• Easing of IPO documents re-filing norms
   
• Certain NBFCs exempted from share pledging-related disclosures
   
• OFS route extended to all firms with m-cap of more than Rs 10 bn
   
• No uniform bond valuation methodology from Sebi 

The multi-notch downgrade of IL&FS papers in September had forced debt schemes to take large haircuts on their exposures. Given the bleak outlook of recovery of their dues, some schemes took the entire haircut, while some took haircut of as much as 50 per cent.  

“This was badly needed. Such accidents (defaults) have become fairly routine thing. Side-pocketing will ensure that nobody unduly benefit or gets hurt. Often investors panic after a default and the smart guys benefit,” said Dhirendra Kumar, CEO, Value Research.

Meanwhile, the regulator said that it has initiated the adjudication proceedings against three credit rating agencies – ICRA, CARE Ratings and India Ratings – for their role in IL&FS fiasco. The three rating agencies had given IL&FS AAA, which indicates the highest grade of credit worthiness.

Among other key measures announced, the market regulator introduced changes to the capital-raising framework to help more promoters divest their holdings through offer for sale route and also encourage listing of start-ups.

To prevent misuse of beneficial ownership norms, Sebi said multiple entities having common ownership, directly or indirectly, of more than 50 per cent or common control shall be treated as part of the same investor group. Hence, the investment limits of all such entities shall be clubbed as applicable to single foreign portfolio investor (FPI).

“The proposal that clubbing of investment limit for FPIs will be on the basis of common ownership of more than 50 per cent of common control was approved. However, in case of appropriately regulated public retail funds, investment limit will not be clubbed on the basis of common control,” said Bhavin Shah, partner, Pricewaterhousecoopers.

Tyagi said the new rules won’t apply to sovereign wealth funds such as Singapore’s Temasek and GIC.

On the OFS, Sebi has allowed companies with market capitalisation of more than Rs 10 billion to use this facility. The move will help state-owned companies such as SJVN, Indian Bank and NLC India tap the OFS route.

On the allegation on Sun Pharma, Sebi said that it has received the whistle-blower complaint and it is examining the matter. On the possibility of reopening the insider case, Ananta Barua, whote-time member, Sebi said, “Within every consent order, there are certain conditions under which the settlement order is granted. So, if these terms are breached, a case can be re-opened.”

To boost startup listings, Sebi has made several relaxations to the institutional trading platform (ITP) based on the recommendations made by an expert panel. ITP will now be called innovator growth platform and will aim for listing of companies that make “intensive use of technology” and those which typically have private equity (PE) investments.