You are here: Home » Markets » Mutual Funds
Business Standard

Sebi limits MF investments in debt instruments with special features

In a circular, the market regulator said that no MF under all its schemes shall own more than 10 per cent of AT1 bonds issued by a single issuer

Topics
Mutual Funds | MF investors | Sebi norms

Chirag Madia  |  Mumbai 

Sebi
According to PRIME Database, nearly Rs 37,000 crore was invested by MFs in perpetual bonds, as of January

The Securities and Exchange Board of India (Sebi) on Wednesday issued curbs on mutual fund (MF) investments in debt instruments with special features such as additional tier-I (AT1) bonds.

In a circular, the regulator said no MF shall, under all its schemes, own more than 10 per cent of AT1 bonds issued by a single issuer.

Further, at the scheme level, the exposure to such instruments shall be less than 10 per cent of the total assets and less than 5 per cent towards a single issuer. The restrictions will apply to all debt instruments that have special features such as subordination-to-equity and convertible-to-equity upon the trigger of a pre-specified event for loss absorption.

At present, there are no specified investment limits on such instruments, which are construed to be riskier than other debt instruments. Last year, several MFs were caught on the wrong foot owing to their investments in YES Bank’s AT1 bonds, which were written down before equity following the RBI’s rescue plan for the lender.

“The announcement will further increase the risk management framework for the MF industry,” said Mahendra Kumar Jajoo, CIO (Fixed Income) at Mirae MF.

According to PRIME Database, nearly Rs 37,000 crore was invested by MFs in perpetual bonds, as of January.

chart

Industry players said existing holdings will not be impacted, given that has allowed grandfathering.

“The investments of MF schemes in such instruments in excess of the limits… may be grandfathered and such MF schemes shall not make any fresh investment in such instruments until the investment comes below the specified limits,” has stated.

Perpetual bonds are fixed income securities with no maturity date. These bonds are not redeemable by the issuer. A regular coupon, which is typically higher than other debt instruments, is paid on these bonds by the issuer, most of which are banks. also stated that debt schemes that invest in such instruments will have to ensure that their scheme information document has provisions for a segregated portfolio.

Further, MFs will have to ensure that the financial stress of the issuer and the repayment capabilities of the issuer is adequately reflected in the valuation of the securities.

Sebi has also directed that close-ended debt schemes shall not invest in perpetual bonds. The circular comes into effect from April 1.

Dear Reader,


Business Standard has always strived hard to provide up-to-date information and commentary on developments that are of interest to you and have wider political and economic implications for the country and the world. Your encouragement and constant feedback on how to improve our offering have only made our resolve and commitment to these ideals stronger. Even during these difficult times arising out of Covid-19, we continue to remain committed to keeping you informed and updated with credible news, authoritative views and incisive commentary on topical issues of relevance.
We, however, have a request.

As we battle the economic impact of the pandemic, we need your support even more, so that we can continue to offer you more quality content. Our subscription model has seen an encouraging response from many of you, who have subscribed to our online content. More subscription to our online content can only help us achieve the goals of offering you even better and more relevant content. We believe in free, fair and credible journalism. Your support through more subscriptions can help us practise the journalism to which we are committed.

Support quality journalism and subscribe to Business Standard.

Digital Editor

First Published: Wed, March 10 2021. 20:06 IST
RECOMMENDED FOR YOU