Sebi widens probe into mutual funds' distressed debt exposure

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Amid rising concerns over mutual fund investors' exposure to distressed corporate bonds, regulator Sebi has widened its probe and has sought fresh details from the fund houses on such investment decisions.
The issue is also likely to be discussed by the mutual fund industry body AMFI, which acts as a front-line regulator as well, at its board meeting here tomorrow.
Some fund houses are keen to take a collective stance and they want AMFI to take up the matter with Sebi to arrive at a common regulatory mechanism on investment in corporate bonds.
However, there is no consensus as some funds want the affected fund houses to resolve the matter individually rather than presenting it as an industry-wide problem, sources said.

The issue caught regulators' attention after a smaller fund house JP Morgan Mutual Fund got into troubles 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.
Sebi is already looking into the issue of some listed companies failing to make proper disclosures on negative developments regarding their credit ratings.

Besides, Amtek's listed subsidiary Castex Technologies too is under the lens amid share price rigging allegations.
With the regulatory heat on them, the Association of Mutual Funds of India (AMFI) is actively looking at ways to address the issue of their exposure to distressed corporate debt securities and alleged failure of some funds in making proper disclosures about their exposures, a senior executive at a leading fund house said.

At its meeting tomorrow, AMFI would discuss the matter to chart out a "pro-investor and pro-industry" approach, he added.
The focus would also be on putting in place a mechanism whereby mutual funds do not just depend on ratings to decide on their investments.
Credit rating agencies take action on a particular entity after analysing financial situation for sometime and a fund house taking an investment call merely based on a rating move would be like being behind the curve.
Sources said some mutual fund houses are also being probed to ascertain whether they failed to furnish information to investors about their exposure to such debt crisis-hit companies.

Recently, JP Morgan Mutual Fund restricted redemptions from two of its debt schemes -- Short Term Income Fund and India Treasury Fund.
The move came in the wake of a decline in NAVs (net assets value) of the schemes due to fund house's exposure to Amtek Auto's debt papers. These schemes have a collective exposure of about Rs 200 crore in Amtek Auto.