Be careful on corporate debt investments: Sebi to MFs

Concerned over mutual fund investors' exposure to distressed corporate bonds, markets regulator Sebi today asked fund houses to be careful about such investments and said it has launched a wider scrutiny of the risks posed by such investment decisions.
Securities and Exchange Board of India chairman U K Sinha also said that Sebi may soon issue additional guidelines for credit rating agencies with respect to rating procedures on such corporate bonds.
The issue assumes significance in the wake of some mutual fund schemes facing huge losses due to sudden rating actions on certain distressed corporate bonds.
Sinha said Sebi "has begun the process" of looking into concentration risks, sector risks as well as company risks with respect to mutual funds exposure to debt papers.

"We (Sebi) have observed that perhaps mutual fund industry was not being very careful about the investments they are making in the debt products and the process they were following," he said here.
Noting that some improvement is needed in the functioning of credit ratings agencies and debenture trustees, Sinha said the regulator be issuing additional guidelines for the rating agencies soon.

"India is one of the first countries where rating agencies are regulated and the system prevalent here is robust. What we started looking at was that why is it that in certain cases, where the papers were being rated investment grade, suddenly the rating was suspended," Sinha said.

"May be there was genuine reason for suspending, I am not questioning it. But that has to be explained to investors and public at large. Our feeling was, that was not being done," Sinha said.
He also said that Sebi had raised certain red flags with its meeting with credit rating agencies including those with respect to conflict of interest.
"We had a meeting with all the ratings agencies and we have explained our concerns to them. There are one or two others areas for example... Is there any conflict of interest in the rating process and you remember this was an issue globally as well at a time," Sinha said.

"I hope there is no such issue but we have flagged it to the rating agencies," he said.
At the same time, Sinha said debenture trustees should provide all relevant information to investors related to corporate bonds.
"Debenture trustees could also be having conflict of interest... May be, their group companies are also investors. There are instances where they have favoured the money to their group company," Sebi chief said.
The issue has caught regulators' attention after J P Morgan Mutual Fund got into trouble due to its exposure to debt securities of debt-laden Amtek Auto, while a few other mutual funds have also faced similar problems with regard to corporate bonds of a few other distressed firms.