Sebi chairman Ajay Tyagi (Mint file)
Sebi chairman Ajay Tyagi (Mint file)

MFs, borrowers can’t have standstill pact, says Sebi

  • 'There cannot be a standstill agreement between mutual funds and their borrowers does not exist'
  • All entities need to follow the mutual fund regulations, says Sebi chief Ajay Tyagi

Mumbai: Ajay Tyagi, chairman of the Securities and Exchange Board of India (Sebi), on Thursday said India’s asset management companies (AMCs) cannot resort to any kind of standstill agreement with borrowers.

“There cannot be any standstill agreement between mutual funds and their borrowers. All entities need to follow the (mutual fund) regulations," Tyagi said on the sidelines of an annual capital market summit organized by industry body, the Federation of Indian Chambers of Commerce and Industry (Ficci).

A standstill agreement is an understanding between a lender and a borrower, wherein the lender stops demanding a scheduled payment of interest or principal on a loan so that the borrower gets time to restructure its liabilities.

On Wednesday, Subhash Chandra’s Essel Group-owned Zee Entertainment Enterprises Ltd (ZEEL) said its lenders, including mutual funds, had extended the loan repayment deadlines.

Mutual funds have lent around 4,000 crore to ZEEL through non-convertible debentures (NCDs). Fund managers of fixed income schemes, such as fixed maturity plans (FMPs), had bought the ZEEL NCDs.

While open-ended mutual fund schemes typically have a flexible redemption deadline, closed-end schemes have strict fund closure deadlines linked to the maturity dates of the NCDs or other debt papers, in which the scheme has invested in. When an AMC agrees to a standstill agreement—primarily to facilitate a borrower who is unable to service debt on the due date—it essentially short-changes investors by disregarding the committed FMP maturity date.

AMCs have been facing rising risk exposure, because of potential defaults by a number of firms (in which mutual funds have invested), which eventually led to rating downgrades. Tyagi said mutual funds should not rely completely on credit rating agencies (CRAs) and should have their own way of assessing risks.

On Tuesday, Sebi had said in a circular that mutual funds should adopt a “waterfall" approach for valuation of money market and debt securities in their portfolios. AMCs must ensure all traded securities are valued on the basis of traded yields, subject to identification of outlier trades by the valuation agencies, Sebi added.

Sebi altered the definition of “below-investment-grade" and “default" in mutual fund norms, stating that a money market or debt security shall be classified as “below investment grade" if the long-term rating of the security is below BBB- or if the short-term rating of the security is below A3.

A money market or debt security shall be classified as “default" if the interest and/or principal amount has not been received, on the day such amount was due, or when such security was downgraded to “default" grade by a CRA.

Sebi mentioned that any extension in the maturity of a money market or debt security shall result in the security being treated as “default". If a security is in default beyond its maturity date, the AMC must disclose the details and the value of the security and the total amount due (including principal and interest).

It said the disclosure will continue till the value of the security recognized in the net asset value is received, or for a period of three years from the date of maturity of the security. Sebi said all debt securities with residual maturity of over 30 days have to be valued at the average of security level prices obtained from valuation agencies to be appointed by Association of Mutual Funds of India.

On 27 June, Sebi had disapproved standstill agreements and said it will initiate action against mutual funds if there were defaults in cases involving loans against shares to company promoters.

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