Indian Regulator Tightens Debt Investment Rules for Mutual Funds
A passenger sits below an advertisement for the ‘Mutual Funds Sahi Hai’ campaign at a bus stop in Mumbai, Maharashtra, India. (Photographer: Dhiraj Singh/Bloomberg)

Indian Regulator Tightens Debt Investment Rules for Mutual Funds

India’s markets regulator unveiled new rules late Wednesday that will limit investments by mutual funds in some debt instruments, after investors suffered losses from writedowns on riskier bonds last year.

The regulations, which take effect April 1, relate to debt such as some securities sold by banks which have features that allow losses to be imposed on creditors before equity holders, according to a circular from the Securities & Exchange Board of India. Bonds sold by banks to boost their capital buffers, known as Additional Tier 1 or Tier 2 notes, may have subordination features that would also come under the rules, according to Sebi.

The India’s capital markets regulator in October barred individual investors from buying Additional Tier 1 bank bonds, citing the need to protect non-professional buyers. Global regulators had introduced such securities after the financial crisis to help avoid taxpayer bailouts.

A year ago, the Reserve Bank of India took the unprecedented step of permanently writing down 87.8 billion rupees ($1.2 billion) of Additional Tier 1 bonds issued by Yes Bank Ltd. when it seized the lender to protect depositors. Local regulators have also been seeking to boost protections for individual investors after Franklin Templeton abruptly shuttered six debt funds last April amid a liquidity squeeze.

The new Sebi limits on mutual-fund investments also apply to bonds that can be converted into equity upon a pre-specified trigger event. The restrictions are:

  • A mutual fund can own, under all its portfolios, at most 10% of such debt sold by a single issuer
  • A debt portfolio can invest at most 10% of its net assets in such debt by all issuers and at most 5% of net assets in such debt sold by a single issuer

Read more on regulations here.

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