Home >Mutual Funds >News >Mutual funds allowed to side pocket restructured debt. Does it help investors?
There is no assurance that once economy stabilise, these companies under stress will also get back to their usual track. There are chances for these stressed assets to grow further, (Photo: iStock)
There is no assurance that once economy stabilise, these companies under stress will also get back to their usual track. There are chances for these stressed assets to grow further, (Photo: iStock)

Mutual funds allowed to side pocket restructured debt. Does it help investors?

Sebi has allowed mutual funds to side pocket debt in cases where borrowers have approached the mutual fund house for debt restructuring due to stress on account of Covid 19.

Sebi has recently made several changes to the 'seggregation of mutual fund portfolio' norms amid covid19 pandemic. The market regulator has allowed mutual funds to side pocket debt in cases where borrowers have approached the mutual fund house for debt restructuring due to stress on account of Covid 19. Before the new rule, a segregated portfolio could be created in a mutual fund scheme by AMC in case of a credit event, which includes downgrade to below investment grade and subsequent downgrades in credit rating by the SEBI registered credit rating agency. These new rules will increase transparency and prevent new investors from participating in the stressed assets, say mutual fund experts.

"By segregating such assets, the regulation would help not only to bring such cases out in the open in public domain but also help new investors to not participate in a toxic asset," says Raghavendra Nath MD Ladderup Wealth Management.

The date on which the restructuring proposal is received by the AMC is to be treated as the trigger date for side pocketing. The new rule will be in effect till December 31.

Sebi on August 31 added that if the credit rating agency is of the view that the restructuring by the lenders or investors is solely due to covid 19 related stress, the credit rating agency may not consider the same as a default event or recognize default.

"Now that SEBI has given freedom to rating agencies in view of covid and RBI has allowed restructuring, rating agencies may not downgrade a company in stress due to covid. The regulator is trying be lenient on companies hit mainly due to Covid 19. This is a temporary abnormal situation and the regulator wants to provide some leeway to companies hit mainly by Covid till the economy stabilize," says Joydeep Sen, faculty, author, columnist.

But, there is no guarantee that once economy stabilise, these companies under stress will also get back to their usual track. There are chances for these stressed assets to grow further, say industry experts.

Raghavendra Nath explains, "while the stress on the company may be COVID related, but there is no assurance the stress would not enhance further which may hamper the company’s ability to service its debt obligations in future. Restructuring of any company’s debt creates a large uncertainty about the future capability to repay interest and principal."

"The financial stress on many sections of the Economy due to Covid-19 is showing no sign of abating. There is a very high chance that some of the companies that mutual funds have lent money to, may also have debt servicing issues. A systematic approach to deal with such stressed assets that can be followed as a standard by all funds would be a welcome step," adds Nath.

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