The Securities and Exchange Board of India (Sebi) on Tuesday re-iterated that mutual fund (MF) players need to strengthen their in-house risk-management practices, instead of relying heavily on credit rating agencies.
The market regulator is probing the role of rating agencies in the IL&FS fiasco. The rating agencies had assigned AAA rating to IL&FS, which indicates the highest grade of credit worthiness.
While speaking at the CII Mutual Fund Summit 2018, S V Muralidhar Rao, executive director of Sebi, explained the rationale behind allowing ‘side-pocketing’ or segregated portfolio. “We analysed some aspects and found that there are some inherent benefits of this mechanism. It stops redemption pressure, prevents fund managers from selling illiquid assets at distressed prices, allows inflows from new investors with the new NAV, and permits existing investors to have a say in the segregated portfolio,” Rao said.
However, he gave the caveat that MFs should not misuse the mechanism and make all necessary disclosures to investors.
He added that Sebi is in talks with industry stakeholders on the valuation norms related to debt securities.
Last week, Sebi introduced the concept of ‘side-pocketing’ – a mechanism to separate distressed assets from the liquid part of a mutual fund scheme. The provision will be optional for schemes taking credits risks in their various debt exposures.
Besides side-pocketing, Rao pointed out that Sebi is closely watching how MFs are utilising the one basis point (bps) of their assets under management (AUM), which are earmarked for investor awareness.
“Some Sebi officials are attending the programmes organised by MFs as investors,” Rao said.
He added that Sebi continues to urge industry players to play their role in the growth of direct plans and cost-efficient products like exchange-traded funds.