Sebi tightens scrutiny of debt funds’ risk exposure, liquidity

India’s markets regulator has sought several details from the nation’s asset management companies and is considering limiting sectoral exposures in credit risk funds to ensure that they are more diversified, three people with direct knowledge of the matter said.

The Securities and Exchange Board of India (Sebi) has started seeking daily data since Friday, after Franklin Templeton India decided to shut down six debt schemes.

The debt funds, especially credit risk funds, were already stressed and the shuttering of the Franklin schemes increased the risk of redemption pressure spreading to other funds in India’s ₹27 trillion mutual fund industry, the people said on the condition of anonymity.

“Sebi has sought details from the industry on their debt schemes portfolio. It is particularly keen to gauge redemption pressures and liquidity position for credit risk funds. Sebi has sought details of the liquidity position of the portfolios, redemption pressure in each scheme, and the number of days it will take to liquidate the securities to meet sudden redemption pressures,” said one of the three people mentioned above. An email sent to the Sebi spokesperson on Wednesday was not answered till press time.

The other details sought by Sebi include details of the underlying securities, their ratings, maturities, tenures of schemes and their mismatches, redemption trend, commissions and fees earned by the asset management companies (AMCs) and the distributors from sale of such schemes, names of companies whose papers have been bought, yields of papers, cash surplus set aside by AMCs for mitigating redemption / liquidity risks, and the category of investors in these schemes, said another of the three people mentioned above.

“It’s an exercise to ensure that debt schemes, particularly credit-risk funds, have enough measures in place to ensure that they can meet any redemption pressures,” said this person.

Debt funds have seen cumulative outflows of ₹24,710 crore from Friday to Wednesday. The maximum redemption of ₹8,210 crore has come from credit risk fund category. Fund houses are resorting to liquidating some of their portfolio to meet redemption pressures, but in these markets that has a high cost, said Joydeep Sen, founder of Wiseinvestor.

“It is not the difficulty per se, but the impact cost. Everything is saleable at a price. For example, even DHFL or Vodafone bonds would be saleable, at say 30% of face value,” said Sen.

According to Sebi norms, in credit risk funds AMCs invest up to 20% of assets under management (AUM) in papers rated above AA to minimize risk. The rest of the 80% can be invested in papers rated below AA.

“In an informal discussion with some members of the Association of Mutual Funds in India, Sebi has indicated that it will soon tighten exposure norms for credit risk funds. Sebi plans to introduce capping on exposures to various category of debt papers AMCs buy from companies and banks for their credit risk schemes and fixed income funds,” said the third of the three people cited above.

As of March end, ₹1 trillion was invested by mutual funds in corporate bonds rated below AA+. In credit risk funds, more than 70% of assets are invested in papers rated AA and A.