MFs can now side pocket all restructured debt till 31 Dec1 min read . Updated: 03 Sep 2020, 08:14 AM IST
- Earlier, SEBI rules only permitted debt downgraded below investment grade (rating below BBB-) or defaulted debt to be restructured
MUMBAI: The Securities and Exchange Board of India (Sebi) Wednesday allowed mutual funds to side pocket debt in cases where borrowers have approached the Asset Management Company (AMC) for debt restructuring.
Earlier, SEBI rules only permitted debt downgraded below investment grade (rating below BBB-) or defaulted debt to be restructured. The new circular, which will be in effect till 31st December will allow even higher rates debt to be side pocketed. The date on which the restructuring proposal is received by the AMC is to be treated as the trigger date for side pocketing.
Side pocketing is the seggregation of units of a scheme in lieu of bad debt. It allows investors to exit the remainder of the scheme without giving up the chance of recovery in the bad debt.
As a nationwide moratorium programme on debt repayment drew to a close on 31st August, the RBI permitted banks to restructure stressed debt affected by Covid 19 related stress. The Central Bank appointed a committee under KV Kamath, former CEO of ICICI Bank, to frame rules for debt restructuring. It also permitted lenders to form Inter Creditor Agreements (ICAs) for restructuring. This made it necessary for Sebi to issue directives since affected borrowers can owe money to banks as well as mutual funds.
In a 31st August circular, SEBI said that if debt is restructured solely due to covid-19, the concerned credit ratings agency may not recognise it as an event of default.
The circular did not address the possibility that even without a downgrade, debt funds holding this type of paper may see a surge in outflows as happened in April 2020 before the freezing of 6 schemes of Franklin Templeton Mutual Fund. The creation of a side pocket can thus counter such outflows since redemptions are not permitted from side pocketed units. Mutual Funds pay holders of such units as and when borrowers make repayments on the stressed debt.