The boardroom of the Securities and Exchange Board of India in Mumbai ahead of a press conference. (Photo: Rajendra Giri/BloombergQuint)

SEBI Board Meeting: SEBI Imposes Curbs On Mutual Funds’ Investments In Debt Securities

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Key Highlights Of SEBI Board Meeting

  • Mutual funds will have to mark to market their investments in debt and money-market instruments. The regulator dispensed with valuations based on amortisation.
  • Mutual funds can only have 20 percent exposure to one sector in a scheme, down from 25 percent earlier.
  • SEBI mandated liquid funds to hold 20 percent holdings in liquid assets.
  • SEBI has levied a graded exit load on investors of liquid schemes who redeem with seven days of making an investment.
  • Chairman Ajay Tyagi said the regulator does not recognise the standstill agreements entered into by mutual funds with companies.

Other Decisions

  • SEBI’s board also approved a framework for issuance of DVR shares.
  • The regulator has mandated that promoters will now have to disclose the reason for encumbrance of pledged shares whenever it crosses 20 percent of the total share capital.
  • SEBI has also amended royalty norms. If the royalty payments cross 5 percent of annual turnover, then the company must get shareholder approval.

Watch Tyagi’s Press Conference Here:

Stricter Norms For Investments By Mutual Funds

The Securities and Exchange Board of India has approved stricter norms on investments by mutual funds, after a spate of credit-related events have put investor money at risk.

Mutual fund schemes will now be mandated to invest in only listed non-convertible debentures. All fresh investments by mutual funds in commercial papers and equities will also be allowed only in listed securities.

Moreoever, the way mutual funds value debt and money market instruments will also be changed. Now, the valuation will be made on a mark-to-market basis, compared to the amortisation basis done earlier. Mutual funds will also have to provide adequate cover—at least four times—for their investments in debt, which has to be backed by equities directly or indirectly.

Concerns about the mutual fund industry's exposure to corporate debt has led to fund flows declining. The concerns about debt investments started in September last year when mutual funds wrote off investments in IL&FS Group. Standstill agreements with Essel and Anil Ambani groups and the troubles of Dewan Housing Finance Corporation Ltd. only added to the worries.

“Mutual funds are not banks, so there’s nothing called standstill. There are investing, not lending,” Tyagi said. There has to be more discipline and prudence in the industry to protect investor’s money, he added.

SEBI Chairman Ajay Tyagi said that the decisions have been taken after wide consultations with the mutual fund industry, which is on board with the amendments. Tyagi said these decisions will help address the stress created by the crisis in the non-banking lenders.

These measures may reduce yields, but they will certainly make mutual fund investments safer.
Ajay Tyagi, Chairman, SEBI

Tweak To Royalty Payment Norms

SEBI has also made an amendment to its royalty payment norms. If the royalty payments cross 5 percent of annual turnover, then it shall require shareholders' approval.

Board felt that 5 percent restriction on royalty payment, as originally recommended by Kotak committee, is good enough. 
Ajay Tyagi, Chairman, SEBI

SEBI Doesn't Recognise Standstill Agreements: Tyagi

The chairman said that the regulator does not recognise any standstill agreement between promoters and mutual funds. “Mutual funds are not banks, so there's nothing called standstill. There are investing, not lending.”

Tyagi said that restrictions have been introduced in consultation with the industry to bring in more discipline and protect investors' money.

SEBI Board Meeting: SEBI Imposes Curbs On Mutual Funds’ Investments In Debt Securities

SEBI Chairman On DVR Shares

Tyagi said the regulator has taken a cautious approach with differential voting rights in shares. This is the first time this is being tried in India, he said.

There’s also a counter argument that corporate governance needs to be tightened, Tyagi noted, adding that SEBI has tried to address those concerns.

Industry On-Board With Amendments: Tyagi

Tyagi said that the reglator has had wide consultations with the mutual fund industry about amending rules for valuation of debt securities. The industry is on-board with the amendments, he said.

Investments by mutual funds are different from lending by banks and they need to balance safety and investment. Such investments have to be prudent, Tyagi said.

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