Sebi to issue circular on 'side pocketing' by MFs soon

Markets regulator Sebi Thursday said it will issue a directive soon on terms and conditions for mutual funds to separate their distressed debt assets, a process widely known as 'side pocketing'.

The Securities and Exchange Board of India (Sebi) has agreed in principle to the proposal put forward by the mutual funds industry, Sebi chief Ajay Tyagi said.

Sebi will ensure adequate safeguards for investors and look into it that fund managers do not misuse it.

"We will come out with a circular that will put terms and conditions to safeguard the investors and not misused by the MFs," Tyagi said on the sidelines of a Indian Institute of Management-Calcutta (IIM-C) event here.

'Side pocketing' is a mechanism to separate distressed, illiquid and hard-to-value assets from other more liquid assets in a portfolio. It prevents the distressed assets from damaging the returns generated from more liquid and better-performing assets.

Currently, in the case of credit events, the existing investors potentially lose all the value. Any further recovery accrues to the investors in the scheme only at the time of recovery. With side pocketing, the investors who take the hit when the credit event happens, get the full upside of future recovery.

The proposal comes in the wake of a liquidity squeeze triggered by the Infrastructure Leasing & Financial Services (IL&FS) default.

IL&FS and its subsidiaries have defaulted on several debt repayments recently due to liquidity crisis. The company, as of March 2018, owed over Rs 91,000 crore to banks and other creditors.