Do not consider lockdown-related delays in payment as default: Sebi to MF valuation agencies

Market regulator Sebi on Thursday asked valuation agencies not to consider any lockdown-related delay in payment of interest or principal or extension of maturity of a security as default for the purpose of valuation of money market andecurities held by mutual funds.

This was one of the major issues faced by mutual fund houses during the ongoing nationwide lockdown.

The valuation agencies appointed by the Association of Mutual Funds in India (AMFI) provides valuation of money market and debt securities and recognise default of securities.

The move follows a three-month moratorium on payment permitted by the Reserve Bank of India to mitigate the burden of debt servicing due to disruptions caused by the coronavirus pandemic and to ensure continuity of viable businesses.

In a circular, the Securities and Exchange Board of India (Sebi) said a differentiation in treatment of default, on a case to case basis, needs to be made as to whether such default occurred solely due to the lockdown or loan moratorium.

Based on assessment, if the valuation agencies appointed by AMFI are of the view that the delay in payment of interest/principal or extension of maturity of a security by the issuer has arisen solely due to COVID-19 pandemic lockdown ... creating temporary operational challenges in servicing debt, then valuation agencies may not consider the same as a default for the purpose of valuation of money market or debt securities held by mutual funds," it added.

However, if there is any difference in the valuation of securities provided by two valuation agencies, the conservative valuation shall be accepted.

This shall be in force till the period of moratorium by the RBI.

However, as per the Principles of Fair Valuation specified in under mutual fund norms, asset management companies would continue to be responsible for true and fairness of valuation of securities.

Last month, Sebi had asked credit rating agencies not to consider as default any delay in payment of interest or principal loan amount arisen solely due to the nationwide lockdown conditions.