Sebi reverses previous decision prohibiting debt MFs to invest in unlisted NCDs
- Sebi reduces the sectoral exposure cap on debt funds from 25% to 20% and mandates liquid funds to hold at least 20% of their assets in liquid securities
- It also imposes a graded exit load on withdrawals from liquid funds within 7 days of investment
In a meeting on Wednesday, the Securities and Exchange Board of India (Sebi) reversed a decision taken previously in June to prohibit debt mutual funds from investing in unlisted non- convertible debentures ( NCDs). In a board meeting on 27th June, Sebi had announced a slew of measures with respect to debt mutual funds in order to prevent a recurrence of the credit crisis that has swept through the industry in the year gone by. Among other decisions, the board reduced the sectoral exposure cap on debt funds from 25% to 20% and mandated liquid funds to hold at least 20% of their assets in liquid securities like treasury bills, cash, government securities and repo on government securities. The board has also decided to impose a graded exit load on withdrawals from liquid funds within 7 days of investment. In a meeting on 21st August 2019, the Sebi board approved amendments to the Sebi (Mutual Fund) Regulation, 1996 to put its decisions into effect.
However, the board did a rethink on a proposal requiring debt funds to invest only in listed NCDs. It allowed debt mutual funds to invest up to 10% of their corpus in unlisted NCDs having simple features as may be notified from time to time. Such NCDs need to be rated, secured and have monthly coupons (interest payments). The board further said that this decision will be implemented in a phased manner by June 2020.
A debt fund manager who declined to be named said that the Sebi decision keeps the door open for pass-through-certificates (PTCs) which generate monthly cashflows. Pools of auto loans or mortgages for instance can come under this category. “Rather than shutting the door entirely, this move has left some room open to unlisted NCD investment. This may further be increased by the regulator once confidence returns the market,” the fund manager said."This decision is not likely to cause substantial difference to debt fund returns," said Mahendra Kumar Jajoo, head, fixed income, Mirae Asset Mutual Fund.
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