Sebi tightens norms for MFs' exposure to riskier bonds
Markets watchdog Sebi on Monday tightened its norms for mutual funds' exposure to riskier corporate bonds including by capping the investment limit in bonds of a single company at 10 per cent in a move to safeguard investors' interest. The single sector exposure limit would also be lowered from 30 per cent to 25 per cent, while group-level investment limits of 20-25 per cent have also been introduced for the mutual funds (MFs) investing in debt securities.
The move comes after JP Morgan Mutual Fund got into troubles due to its exposure to debt securities of Amtek Auto, while a few other fund houses have also faced similar problems with regard to corporate bonds of other distressed firms. The measures will mitigate risks arising on account of high levels of exposure in the wake of events pertaining to credit downgrades and put mutual funds in a better position to handle adverse credit events. It would also provide mutual fund investors with enhanced diversification benefits, Sebi said in a circular. The new norms will reduce sector exposure limits of debt schemes to 25 per cent from current 30 per cent. In the case of housing finance companies, the cap is an additional 10 per cent. Now, the regulator has decided to slash this to five per cent. Besides, fund houses will not be able to invest more than 10 per cent of a scheme's corpus in debt securities of a single company. However, it can be extendable to 12 per cent of net assets value (NAV) after trustee's approval. Currently, the limit is 15 per cent.
The revised investment restrictions at issuer, sector and group level would be applicable to all new schemes and fresh investments by existing schemes from today, while the existing schemes will have to comply with the new norms within a period of one year. .
"An MF scheme shall not invest more than 10 per cent of its NAV in debt instruments comprising money market instruments and non-money market instruments issued by a single issuer which are rated not below investment grade by a credit rating agency authorised to carry out such activity under the Act," Securities and Exchange Board of India (Sebi) said.
"Such investment limit may be extended to 12 per cent of the NAV of the scheme with the prior approval of the Board of Trustees and the Board of directors of the asset management company," it added. The investment within such limit can be made in mortgaged-backed securitised debt which are rated not below investment grade by a credit rating agency registered with Sebi.
However, such limit will not be applicable for investments in government securities, treasury bills and collateralised borrowing and lending obligations.