SEBI to come out with norms on valuation of debt securities

The regulator is evaluating two areas in valuation practice – securities with maturity of less than 60 days and below investment grade.
By Morningstar |  18-12-18 | 

In the wake of recent credit risk events, Securities and Exchange Board of India is in discussion with fund houses to review and implement valuation guidelines for corporate bonds, said Muralidhar Rao, Executive Director, SEBI, at the CII MF Summit held in Mumbai today.

The regulator is evaluating two areas in valuation practices – securities maturing in less than 60 days and 'below investment grade'. SEBI will come out with a consultation paper on this to seek feedback from the industry. SEBI will give a reasonable timeframe for the industry to adjust to the proposed rules.

Currently, fund houses have to mark-to-market valuations of securities having maturity of up to 60 days and more. Most liquid funds hold securities having maturity of less than 60 days.

Further, the regulator will come also come out with detailed guidelines on side pocketing, which helps funds create segregated portfolios, in the event of a default from an underlying instrument. “It stops redemption pressure and prevents fund managers from selling illiquid assets at a distressed price. It allows inflows from new investors with a new NAV. This facility will be available to mutual funds based on the credit event that occurs. We are coming out with detailed guidelines shortly on this,” said Rao.

Rao cautioned that fund houses should not misuse side pocketing facility and be transparent in communicating about such events to investors. He urged the industry to enhance their in-house credit risk assessment capabilities rather than relying on ratings of third-party agencies.

The practice of side pocketing is prevalent in developed markets, mostly used by hedge funds and alternative investment funds.

Promote direct plans and ETFs

Currently, around 41% of industry assets are concentrated in direct plans. However, a large portion of this is in debt funds where institutional investors dominate. Rao noted that while direct plan assets have seen a healthy growth, the industry needs to focus its effort in popularizing the category further among retail investors. He also urged the industry to promote passive funds and exchange traded funds. Currently, ETFs account for 4 % or Rs 98,000 crore of the total Rs 24 lakh crore industry AUM.

Revised TERs from April 2019

Rao said that in light of the growing size of the industry, SEBI decided to pass on the economies of scale to investors by rationalizing the expense ratios of mutual funds. “The slab wise TERs were introduced when mutual funds regulations were notified in 1996. They have not been revised since then. The size of the industry at that time was Rs 15,000 crore and now it is Rs 24 lakh crore,” said Rao.  The revised TERs will come into effect from 1 April 2019.

Commodity mutual funds

SEBI will soon allow fund houses to come up with commodity mutual funds and PMS. In India, mutual fund houses are not permitted to invest in commodities other than gold.

Add a Comment
Please login or register to post a comment.
Mutual Fund Tools