The Securities and Exchange Board of India (Sebi) has asked fund houses to furnish data on all debt-oriented schemes launched in April-December 2008 as the capital market regulator suspects that many may not have adhered to proper accounting norms, said three persons with direct knowledge of the matter.

At least 870 fixed maturity plans (FMPs) were launched during this period by fund houses. Apart from them, other debt schemes, too, are being scanned by the regulator.

Debt funds invest in instruments such as certificates of deposit, commercial paper and pass-through certificates issued by banks and corporations.

Sebi has directed fund houses to furnish details of the types of instruments bought or sold, the names of the issuers of such instruments, the total amount invested and the amount rescheduled.

Typically, when a firm is not able to meet redemption of its debt paper placed with a fund house, it rolls it over for a fresh tenure and a revised interest rate, which is typically termed as “reschedulement". During such events, investors may suffer as redemption payouts may get delayed.

Sebi has also asked fund houses to disclose whether an instrument was downgraded by their internal credit teams due to such rescheduling.

Mint has reviewed a copy of the letter sent by Sebi to the fund houses.

“Apart from managing assets, the asset managers also have a fiduciary duty. Sebi wants to ensure that none of the fund houses has transferred any loss to any scheme while handling the redemption pressure during that period," said one of the persons.

None of the three officials wanted to be identified as the matter is a regulatory one and the letter sent to the firms is not in the public domain.

A Sebi official declined to comment for this story.

Sebi has also sought details of all non-performing assets under debt-oriented schemes and the provisioning made by the fund houses. The letter was sent to the fund houses in February and the process of evaluation is still on.

In the wake of the liquidity crisis that hit the global financial system in 2008, all categories of investors preferred to get into cash, leading to large-scale redemptions by mutual funds (MFs). To honour this, fund houses extensively used inter-scheme transfers. “While doing such transfers, it is possible that the fund houses may not have strictly adhered to all the rules," said one of three persons cited above.

There are 43 fund houses in the 7 trillion Indian asset-management industry. Traditionally, 60-70% of the industry’s assets have always been debt-oriented schemes.

In the second half of 2008, all cash-strapped financial services firms, including banks and asset management funds, were offering high returns on debt-oriented products to attract money from customers.

Real estate firms, among the hardest hit at the time and facing an acute shortage of working capital, floated debt paper offering high returns. MFs had, in fact, started increasing their exposure to the sector even before the global meltdown sparked by the fall of Lehman Brothers. For instance, LIC Mutual Fund Asset Management Co. Ltd’s FMP Series 35 invested 86% in construction. About 25% of the corpus was invested in assets with a rating of less than AA.

There were several FMPs in the market that had their investments in low-rated scrips.

They also invested in scrips with maturities longer than the schemes themselves. For instance, a three-month FMP used to invest in scrips maturing after six months, technically causing asset-liability mismatches. To be sure, there was no ban on such investments at the time, but Sebi subsequently clamped down on them.

Real estate developers’ problems got compounded when investors made panic withdrawals from debt schemes that had exposure to the sector. This forced the realty firms to opt for a rollover of debt as they did not have enough money to return to bondholders.

When an FMP matures, it redeems underlying securities and pays the money back to investors. For FMPs and interval funds (closed-end income schemes that allow fresh inflows and redemptions at regular intervals), the crisis intensified when underlying assets weren’t enough to repay the principal at redemption time.

“Sponsors of the affected fund houses had to compensate the investors by paying them from their own pockets," said an income fund manager, who did not want to be named. He also said some interval funds suffered from asset-liability mismatches as many investors used to roll over investments beyond the interval.