Credit funds could see unlisted exposure rise over high redemptions

Shrinking asset size has added to challenges in bringing down levels of such investments

High redemptions in credit-risk funds could further increase exposure levels of such funds to unlisted debt papers. The schemes in this category have seen their asset size shrink and this is likely to lead to a rise in the proportion of unlisted debt papers.
 
According to industry estimates, several schemes in the category had exposure to unlisted securities in the range of 10-22 per cent.
 
Industry players say that fund houses could find it challenging to bring down unlisted exposure in such schemes in-line with the regulatory norms as redemptions have continued. In May, the credit-risk fund category saw asset size declining by Rs 5,258 crore to Rs 29,963.86 crore (as of May 29).

 
“While overall market liquidity has improved, there is less liquidity for unlisted securities as MFs are avoiding taking incremental exposure in this market segment. Further, companies need to complete a lot of listing norms before the extended deadline given by the Securities and Exchange Board of India (Sebi),” said a fund manager.
 
“Some credit risk schemes can find it more challenging as exposure to unlisted debt is in the range of 50-70 per cent,” he said.
 
Industry sources say Sebi has recently asked MFs to disclose their exposure to unlisted papers to take stock of the situation.
 
The regulator has allowed debt MFs to bring down their exposure to unlisted debt papers to 10 per cent or lower by December 31, 2020.

In October 2019, Sebi had barred MFs from investing in unlisted debt securities, allowing only limited exposure, as long as the unlisted debt security had a simple structure.
 
Recently, Sebi pointed out unlisted debt securities, particularly those where a single investor invested, suffered on two fronts. “Opaqueness of structure and the true nature of risk on one hand, and lack of ongoing disclosure in respect of financials of the issuer… (on the other)”
 
Experts say unlisted exposure may not necessarily help in gauging the risk profile of a credit risk scheme from investors’ perspective.

 
“Credit risk funds can reduce risks by holding shorter-tenure papers. Investors can look at what is the proportion of debt papers held at what duration. Further, rating and parentage of the issuer can be the second set of factors,” said Vidya Bala, co-founder of primei-nvestor.in.
 
Sebi had earlier stated debt MF schemes shall not have more than 10 per cent exposure to unlisted papers, and needed to bring down their outstanding exposure to this limit by June 2020. By March 2020, MFs were required to bring it down to 15 per cent.
 
However, on the industry’s request for relaxations in light of the pandemic and liquidity constraints amid the lockdown, Sebi extended the timelines for reducing exposure to 15 per cent to September 30 and 10 per cent to December 31.