Mumbai: With an aim to safeguard mutual fund investors from high-risk assets, regulator Sebi wants fund houses to shift all their investments to listed or to-be-listed equity and debt securities in a phased manner and reduce their exposure to unrated debt instruments from 25 per cent to 5 per cent.
After a meeting of its board here on Wednesday, Sebi said it has also decided to give flexibility to mutual funds to invest in unlisted non-convertible debentures (NCDs) up to a maximum of 10 per cent of the debt portfolio of the scheme.
This would be subject to such investments in unlisted NCDs having simple structures, being rated, secured and with monthly coupons. This would be implemented in a phased manner by June 2020. Exposure to risky debt securities has emerged as a major risk for capital market investors, including those coming through the mutual fund route, and the regulator has been making efforts to enhance its regulatory safety net against such risks.
Taking forward certain decisions approved by Sebi's board earlier in June, the regulator has now finalised the draft amendments to the prudential norms for mutual fund schemes for investment in debt and money market instruments. Some further amendments were also approved by Sebi's board at its meeting held here on Wednesday. A key proposal is to reduce the existing overall limit for investment of mutual fund schemes in unrated debt instruments, except those for which specific norms are separately provided, from 25 per cent to 5 per cent. Further, the existing provision of the single issuer limit of 10 per cent for investment in unrated debt instruments has been proposed to be dispensed with, an official said.
However, the official said these proposed limits may need to be reviewed periodically by Sebi after taking into account the market dynamics and participation of mutual funds in unrated debt securities.
Among other decisions which have in-principle already been approved by the Sebi board and need to be incorporated in the amended regulations, the valuation of debt and money market instruments based on amortisation would be dispensed with and would shift completely to mark-to-market valuation with effect from April 1, 2020. Also, mutual funds would be permitted to accept upfront fees with disclosure of all such fees to valuation agencies and standard methodology for treatment of such fees would be issued by industry body AMFI in consultation with Sebi.