Sebi says mutual funds can use 'side-pocket' for unrated debt

Market regulator clears grey area for exposures not graded by rating agencies

The Securities and Exchange Board of India (Sebi) on Thursday issued a circular clarifying that a side-pocket could also be created in the case of unrated debt instruments.

The circular said that in the case of such instruments, side-pocket can be created only when there is an 'actual' default on the principal or interest payment.

Earlier, guidelines laid down by Sebi say that side-pocket can be created when there is a credit event, i.e. downgrade of an instrument to below-investment grade. However, there was no explicit guideline for an unrated debt, where the side-pocket rule could not be triggered by