Sebi seeks to make mutual funds' valuation process fairer

In a slew of reform measures, securities market regulator Sebi's board on Friday approved changes in its norms for open offer exemptions for corporates facing debt restructuring as also for debt instrument valuation by mutual funds to make these processes fairer.

The Sebi board, at the same time, approved easing of norms for raising of funds through instruments like real estate and infrastructure investment trusts.

The regulator will amend its norms for valuation of money market and debt securities by mutual funds to make the process fairer and uniform across the industry to safeguard investors from default like scenarios as witnessed recently in the wake of IL&FS crisis and other defaults.

The proposal seeks to make the valuation practices more reflective of the realizable value of money market and debt securities with residual maturity up to 60 days.

Accordingly, the residual maturity limit for amortisation based valuation by mutual funds will be reduced from 60 days to 30 days.

The threshold maintained between reference price and valuation price would be plus or minus 0.025 per cent, while the reference price will be taken as security level price given by the valuation agencies.

The board also approved a proposal to bring uniformity and consistency across the mutual fund industry on valuation of money market and debt securities rated below investment grade, Sebi said.

The valuation agencies appointed by the Association of Mutual Funds in India (AMFI) will provide valuation of money market and debt securities rated below investment grade, the regulator added.

As the Asset Management Companies are responsible for fair valuation, they may deviate from the valuation provided by the valuation agencies subject to recording of detailed rationale for such deviations, appropriate reporting to the Board of AMC and Trustees and appropriate disclosures to investors, it noted.

On the changes in norms relating to corporate debt restructuring, Sebi said exemptions from applicability of conditions for preferential issue and from the obligation of making an open offer will be restricted to all scheduled commercial banks (excluding Regional Rural Banks) and all India Financial Institutions for acquisitions in their ordinary course of business.

Such exemptions will not be available for acquisition of shares by persons other than these lenders by way of allotment by the target company or purchase from lenders, Sebi said.

The board also noted that relevant exemptions, including open offer obligations, are available under the Sebi regulations for acquisition pursuant to a resolution plan approved under the Insolvency and Bankruptcy Code.

Further, Takeover Regulations provide for exemption from open offer for any acquisition pursuant to a scheme of arrangement or reconstruction pursuant to an order of a court or a tribunal or a competent authority under any law or regulation, Indian or foreign.

The Sebi board has now approved that the reference to approval by "Competent Authority" in the Takeover Regulations will be deleted.

On the proposal regarding REITs and InVITs, Sebi said the approved amendments to the norms include those relating to minimum allotment and trading lot, value of such allotments, among others.

The regulator had introduced REIT/InVIT laws in 2014, but it has been continuously amending its norms to make this market segment more attractive. Till date, three InVITs have issued and listed their units raising approximately Rs 10,000 crore, while one REIT is in the process of making a public offer.

Under the proposed changes, the minimum allotment by REITs/InVITs would need to be made in multiples of a lot, each consisting of 100 units, while value such allotment lot for InvITs would be Rs one lakh and for REITs Rs 50,000.

After listing, trading will be in multiple of one lot. The leverage limit for InvITs will be increased from existing 49 per cent to 70 per cent of InVIT assets.

The increase in the limit would be subject to certain additional disclosure and compliance requirements, such as the consolidated debt of the InvIT and the project debt having a credit rating of AAA.

The InvIT will need a minimum track record of 6 distributions on a continuous basis, post listing, in the years just preceding to the financial year in which the enhanced borrowings are proposed to be made.

Separate framework for privately placed unlisted InvITs, which provide sufficient flexibility to both issuers and investors, will be created, Sebi said.

For this, the minimum number of investors will be as determined by the issuer, including the maximum holding of units by a single investor. The leverage would be determined by the issuer after consultation with investors.

The underlying assets can be completed, under construction or both, while the minimum investment by an investor can not be less than Rs 1 crore.

The latest amendments are being made following representations from the industry and market participants, followed by a public consultation process.