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 markets 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.
Industry players said existing holdings will not be impacted, given that Sebi 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,” Sebi 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. Sebi 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.