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Business News/ Market / Stock-market-news/  Sebi chairman Ajay Tyagi warns mutual funds over bad assets
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Sebi chairman Ajay Tyagi warns mutual funds over bad assets

Sebi chairman Ajay Tyagi says mutual funds should strengthen due diligence, ensure bad loans in the banking system do not shift to funds by way of transfer of debt

Sebi chief Ajay Tyagi also called for consolidation, saying over 45 mutual fund houses are selling more than 2,000 products. Photo: MintPremium
Sebi chief Ajay Tyagi also called for consolidation, saying over 45 mutual fund houses are selling more than 2,000 products. Photo: Mint

Mumbai: Securities and Exchange Board of India (Sebi) chairman Ajay Tyagi on Thursday warned fund managers against adding bad assets to their portfolios when investing in fixed-income securities.

“….Another issue is that there have been instances of defaults in debt portfolios of mutual funds. Mutual funds need to strengthen their own due diligence and evaluation mechanism and not depend only on credit rating agencies," Tyagi said at a summit organized by the Association of Mutual Funds in India (Amfi), a lobby group.

“Care should be taken that NPAs (non-performing assets) do not get shifted to mutual fund portfolios by way of transfer of debt. Fund managers need to be watchful and responsive," he added.

In January 2016, Sebi tightened the norms for investment by debt-oriented mutual fund plans and introduced caps on how much they can invest in debt issued by an individual company, a business group or to any specific sector.

The review followed a redemption crisis in August 2015 at JPMorgan Asset Management Co. The fund house, which was later bought by Edelweiss Mutual Fund, was forced to restrict redemptions in two of its schemes due to a downgrade of bonds issued by Amtek Auto Ltd. The two schemes had Rs193 crore of exposure to fixed-income securities issued by the auto parts maker.

While the restrictions on redemptions in the two JPMorgan schemes was the most dramatic instance of a crisis caused by a mutual fund’s exposure to sub-standard fixed-income assets, rating downgrades across debt instruments have been on the rise due to the deteriorating credit quality across companies and industries.

In November 2016, Sebi tightened the norms for credit rating agencies too and asked them to define the basis on which they rate companies and how the assessment is carried out.

“There is always a scope for taking better care about exposure but currently there is a fairly tight structure put in place to evaluate the credit matrix and take a transaction-based approach while deciding on investments," said Lakshmi Iyer, chief investment officer, debt, Kotak Mahindra Asset Management Co. Ltd.

“Safeguards against any credit fiasco should be taken with abundant caution but presently the risks are limited. Staying away from high-risk papers may not impact the prospective returns of the schemes much if the portfolio is adequately diversified. And, at the end of the day, rating is only a hygiene check; it is not a sufficient condition. One just needs to ensure that there is no concentration risk so that exposure to any bad paper does not impact the return much."

On Thursday, Tyagi also urged fund houses to be careful in introducing new investment avenues such as Real Estate Investment Trusts (Reits) and Infrastructure Investment Trusts (InvITs).

“This really is a testing time for fund managers. We are concerned about individual investors. REITs and InvITs are new instruments. Fund managers should first educate themselves and then educate the investors about these new instruments and new avenues. Sebi has followed a guarded approach about investment in new instruments," Tyagi said.

The market regulator also expressed concern about low penetration of mutual funds in locations beyond the top cities and utilization of money for advertising mutual fund schemes.

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ABOUT THE AUTHOR
Anirudh Laskar
Anirudh reports on significant corporate matters including large mergers and acquisitions, India's emerging e-commerce sector and regulatory issues in the corporate and financial services industry. Over the past 17 years, he has covered many beats including banking, NBFCs, aviation, automobile, insurance, markets, SEBI, IRDAI, mutual funds, investment banking, private equity, deals, and conglomerates.
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Published: 29 Jun 2017, 12:33 PM IST
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