Sebi sets lower single-issuer limits for mutual fund debt schemes

Credit-risk rating based limits introduced for all new schemes; existing schemes to be grandfathered

The Securities and Exchange Board of India (Sebi) has introduced a credit-rating based single issuer limit for actively managed mutual fund schemes, potentially lowering the investment threshold in lower-rated papers.
 
Asset management companies (AMCs) have been directed not to invest more than 10 per cent of the scheme’s net asset value (NAV) in AAA-rated debt and money market securities from a single issuer. Schemes will have to limit their exposure at 8 per cent for AA-rated issuers while for instruments below A-rating, 6 per cent has been set as the threshold.
 
These limits will apply to schemes other than credit risk funds.

 

These investment limits may be extended by up to two per cent on prior approval by the boards of an AMC. However, industry experts said fund houses don’t usually give such approvals.
 
The decision is aimed to avoid inconsistency in MF investments in debt instruments, the regulator has said.
 
Earlier in May, Sebi had imposed credit-risk based single-issuer limits for debt exchange traded funds (ETFs) and index funds.
 
“The step will help manage liquidity-related issues as lower-rated papers don’t have much liquidity. Fund managers will now be forced to diversify more for lower-rated papers as they can no longer go beyond the limits prescribed, thus helping investors reduce risk,” said Marzban Irani, chief investment officer-debt, LIC Mutual Fund.

 
These limits will be applicable to all new schemes while existing schemes will be grandfathered from these guidelines until the maturity of invested debt and money market securities.
 
If not for the grandfathering provision, existing schemes would have been forced to liquidate lower-rated papers to meet the prudential limits, said industry players.
 
For the credit risk-based limits prescribed, long-term ratings of the issuers will have to be considered.
 
“If no long-term rating is available for the same issuer, then based on credit rating mapping of CRAs between short-term and long-term ratings, the most conservative long-term rating shall be taken for a given short term rating,” said Sebi.