Sebi gives nod to distressed assets' segregation by MFs
New Delhi: Markets regulator Sebi Friday allowed mutual funds to create segregated portfolios with respect to debt and money market instruments, while ensuring fair treatment to all the unit holders.
Creation of segregated portfolios is a mechanism to separate illiquid and hard-to-value assets from other more liquid assets in a portfolio.
It prevents the distressed assets from damaging the returns generated from more liquid and better-performing assets.
"In order to ensure fair treatment to all investors in case of a credit event and to deal with liquidity risk, it has been decided to permit creation of segregated portfolio of debt and money market instruments by mutual funds schemes," Sebi said in a circular.
The regulator said that segregated portfolio may be created, in case of a credit event at issuer level -- downgrade of a debt or money market instrument to 'below investment grade' or subsequent downgrades of the instruments from 'below investment grade' or similar such downgrades of a loan rating -- by a registered credit rating agency.
In case of difference in rating by multiple credit rating agencies, the most conservative rating will be considered.
The Sebi said that creation of segregated portfolio will be optional and at the discretion of the Asset Management Company (AMC). It should be created only if the scheme information document has provisions for such portfolio with adequate disclosures.
AMCs need to have a detailed written down policy on creation of segregated portfolio and the same need to be approved by the trustees.
In order to avoid misuse of segregated portfolio, the Sebi said trustees will ensure to have a mechanism in place to negatively impact the performance incentives of fund managers, chief investment officers among others in the investment process of securities under the segregated portfolio, "mirroring the existing mechanism for performance incentives of the AMC, including claw back of such amount to the segregated portfolio of the scheme".
The new mechanism should not encourage the AMCs to take undue credit risk in the scheme portfolio and any misuse of the provisions of segregated portfolio, would be considered serious and stringent action may be taken, the Sebi noted.