Sebi likely to limit MFs' exposure to corporate groups to mitigate risks

Norms related to loan-against-shares model can be tweaked to deal with promoters with high levels of pledging

The Securities and Exchange Board of India (Sebi) might limit mutual funds’ (MFs’) exposure to corporate groups to mitigate the risks the MF industry has been facing on its debt exposure since the Infrastructure Leasing & Financial Services (IL&FS) crisis came to light.

The regulator is reviewing various debt schemes' concentrated exposure to a single corporate group, investments in promoter-backed instruments where pledging is high, and lack of adequate number of risk analysts. It is also planning to set a minimum threshold of ‘liquid’ exposure in liquid schemes. 

"In the past few months, there has been a lot of scrutiny on debt exposure. Sebi is concerned with concentrated exposure of debt schemes to some stressed groups," said the chief executive officer of a fund house. 

Sebi regulations permit a debt scheme’s exposure to firms belonging to the same group at 20 per cent of assets and an additional 5 per cent with the trustees' approval. 

"After the IL&FS crisis, some schemes' exposure to stressed groups breached these limits as redemption pressure forced them to offload liquid papers. Such schemes' exposure to firms belonging to a single group were already on the higher side, which was aggravated further," said another senior executive. "The regulator could reduce these group limits so that fund houses are more conservative," the official added. 

According to sources, the regulator has also initiated talks with industry participants to deal with risks around the loan-against-shares (LAS) model. The LAS instruments, which are backed by promoters' pledged shares, have come under the spotlight as promoters with high levels of leverage and pledging have faced repayment troubles recently. 

"The regulator is reviewing norms related to LAS exposures as recent events have underscored how investment in firms with high levels of pledging or leverage can deteriorate in difficult markets. When there is erosion in share price, high-pledging limits promoters' ability to top-up share collateral," said a fund manager. "The regulator might look at the Reserve Bank of India's norms, which set the minimum equity cover for such transactions at two-times," he added. 

According to sources, liquid schemes could see some more changes as the regulator is considering setting a minimum threshold for exposure to liquid papers.  

"Currently, there is no uniformity in the exposure level to liquid papers such as government bond and treasury bills. Some liquid schemes don't maintain adequate exposure to such papers. Sebi is considering a proposal for setting the exposure to such instruments at 20 per cent, which can give liquidity buffers to the schemes in tough markets," said a senior industry executive.

The heavy redemption pressure after the IL&FS crisis had made it difficult for certain liquid schemes, especially those belonging to smaller fund houses, to handle the sharp outflow of money. Since September, these schemes have seen close to Rs 1 trillion of outflow.

While the role of rating agencies has come under regulatory scrutiny, sources say Sebi wants fund houses to have enough internal resources in the form of risk analysts and a risk manager to assess credit risks. "The regulator has noted that certain fund houses manage large pools of money, but don’t have enough analysts to assess credit risks," said the senior executive quoted above.