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In a circular dated September 13, 2012, Sebi had said the existing debt schemes’ total exposure to a particular sector should not increase from the levels existing (if above 30 per cent) one year from that day. The move is aimed at reducing sector concentration risks in these schemes.
Mutual fund officials said the circular, however, did not mention whether the rules were ‘retrospective’ or ‘prospective’. This means there is lack of clarity about whether debt schemes, especially long-term close-ended schemes, would also have to comply with the limit by mid-September.
Most open-ended schemes have already cut exposure per sector to 30 per cent but close-ended products have not, said officials. This is because close-ended schemes, such as fixed maturity plans, have locked their money in long-term paper. Selling before maturity could result lower prices, thereby weighing on scheme returns. Also, fund managers find it challenging to redeploy funds with the same yields because of softening interest rates.
Amfi has written to Sebi to work out a way so that investors do not take a hit, a source said.
“The industry has asked Sebi if the rule could be modified so that investor interests are not hurt. There could be sharp sell-off as the exposure to certain sectors is way beyond the 30 per cent cap. Especially, close-ended schemes could take a bad hit,” said a senior official with a leading asset management company, who did not want to be identified.
According to industry players, debt schemes have the maximum exposure to non-banking finance companies—as high, as 70 per cent, followed by infrastructure.
Investor sentiment in the debt market is already weak following huge sell-off by foreign institutional investors (FII). In June, FIIs selling in the debt market was to the tune of Rs 30,000 crore ($5.4 billion).
“There has been a sell-off in the debt market from foreign investors. The situation could worsen if mutual funds also start selling debt to meet the Sebi requirement,” said another sector official.
Also, lower returns from schemes would put mutual funds in a spot because, at the time of selling the product, investors are given indications about returns, though this practice is banned by Sebi. Still, mutual funds unofficially give clients how much a product would return after maturity, as it makes selling easier. Sector officials said as lower-than-indicated returns would not go down well with unit-holders, mutual funds would be forced to make up for this shortfall from their pockets.
Exclusion of fixed maturity plans, close-ended schemes, or application of the rule prospectively are some relaxations suggested by the sector. “Sebi can apply the rule prospectively by exempting schemes already launched in September 2012. Also, we have asked the regulator to distinguish between open-ended and closed-ended schemes,” said the official quoted earlier.
THE CAP DOESN'T FIT
- Sebi limits sector’s total exposure to 30 per cent of scheme assets
- Move to reduce concentration risk
- AMCs seeking extension of deadline which ends mid-September
- Some schemes have 70 per cent exposure to NBFC, infra paper
- Fund houses believe sell-off to meet norm could hurt investor returns
- Redeployment of funds could pose a challenge
