Sebi may tighten redemption rules after JPMorgan fund woes

India's market regulator plans to tighten mutual-fund redemption rules after JPMorgan Chase & Co in September restricted payouts from its local funds holding Amtek Auto bonds as some investors demanded their money back. "We're going to make some changes in our regulations" for funds capping repurchases, U K Sinha, chairman of the Securities & Exchange Board of India, said in an interview at his office in Mumbai. "We're going to fine tune them further - what situation can you do it and for how many days and up to what level."

Amtek Auto, the New Delhi-based supplier of parts to automakers such as Ford Motor Co and Maruti Suzuki India, roiled creditors after a local rating agency slashed its credit score by four levels in one stroke in August. That led to an erosion in the net asset value of JPMorgan's India Treasury Fund and India Short Term Income Fund, prompting the money manager to limit repurchases to one per cent of total outstanding units.

JPMorgan in September sought approval from investors in the two funds to separate the troubled debt from other assets, a move that would help it lift the cap on redemptions. Amtek Auto's bond, which matured later that month, was the biggest holding in the Short Term Income Fund, making up 15 per cent of assets on July 31. The security was among the top 10 holdings of India Treasury Fund.

"Capping liquidity was not an ideal thing to do," Kaustubh Belapurkar, director of fund research at Morningstar Investment Adviser India Pvt in Mumbai, said by phone. "They could have done the segregation in the first instance, which would have saved investors from panic. Tightening redemption rules will give investors confidence." Mansi Desai, a spokeswoman for JPMorgan Asset Management India Pvt in Mumbai, declined to comment on Thursday.

Amtek's shares slumped a record 72 per cent in the September quarter after the company said it's facing a "temporary cash flow mismatch" due to declining sales and narrowing profit margins.

The company has received a lot of interest for the minority holdings in overseas units that it put up for sale to raise funds and cut debt, John Flintham, senior managing director, said in an interview with Bloomberg TV India on Tuesday. The stock surged 14 per cent that day. It slid 2.2 per cent at 12:56 pm in Mumbai.

Ratings Suspension

The company saw its bonds score cut to C by Brickwork Ratings India Pvt. The agency on October 7 lowered it further to default, citing coupon delays. The regulator may order rating companies to explain the reasons before suspending ratings, Sinha said.

"We are looking at what are the situations where you can suspend ratings, and how to convey that message to the market transparently," he said. "Sudden withdrawal of ratings don't convey anything to bondholders."