Mutual Funds – A Closed Chapter for Unlisted Debt Funds
What is there in the Securities and Exchange Board of India
(SEBI) Stricture?
SEBI, vide its circular dated 1st October 2019 (“Circular”)
has mandated and restricted all Mutual Funds to invest only through the listed
and rated debt mutual funds and Securities channel, paving the way for enhanced
credit risk management. This will result in higher and secured returns for the
investors and fund managers.
The Circular further instructs that it will not stop the
funds to invest in unlisted Non-Convertible Debentures (NCDs) on the condition
of maintaining a simple and verified structure.
The Circular also grants leverage to invest in Securities
under the government issuance and control and also in those for whom the credit
rating is usually not ascribed.
A Critical Post-Mortem
The Circular is the stepping stone of a new era where the
rights of the Fund Manager Companies of Debt Funds are severely curbed in so
far as the investment in unlisted, unrated and credit enhanced securities are
concerned. SEBI has actually attempted, with all sense and logic, to increase
the security parameters and minimise the risk factors in investing funds in
unlisted commercial papers. It is a proven methodology that the mandatory
listing always forces and obligates the issuing companies of Debt Funds to
furnish some additional declarations and trivia pertaining to their financial
profile and thereby making things more transparent for the investors and the
regulatory authorities.
Further, the Circular provides a fair restrictive measure to
tightrope and prevent the unlisted commercial papers from being over-exposed
and squeezed which has so far been the main source of a number of issues in the
recent debt crisis. The Circular has made the domain a lot more rigorous and
drastic for the Mutual Funds by absorbing the unexpected and increasing
exposure to unrated debt funds, to a reasonable limit of just 5% of the net
assets of a scheme compare to the present 25% irrelevant and harmful exposure
allowed to such securities.
These guidelines by SEBI are expected to be beneficial in
multiple ways as it will improve and bring back the confidence of the investors
in debt funds, once lost in insecurity whirlwind. Moreover, it is helpful in
diversifying scheme portfolios according to requirements and trends. Additionally,
the guidelines facilitate regrouping the level of risk management.
One of the major revelations and key reforms of this Circular
is that Debt Mutual Funds can only invest in listed securities including but
not limited to listed commercial papers and prescribes certain limits for
investment in sponsored group and sector exposure.
Though many Debt Mutual Funds have taken and recorded in
their Books of Account investment in Commercial Papers on an unlisted footing
prior to this Circular coming into effect, SEBI has now outlined a procedure
for the same towards a workable resolution to the effect that such funds shall
be allowed to be held till maturity.
The Circular also ignites controversies and debates as one
major flaw still exists in the form of indulgence to unwanted exposure to
non-sponsor groups at a pretty higher quantum and no real regulatory actions
prescribed to limit its volume. Further, criticisms and contra feedback are
being posted recurrently saying that these new measures will definitely fetch
the best from all Asset Management Companies (AMC). And AMCs will be agile
enough to remain glued to their objectives in determining the creditworthiness
of the issuers and helping in decreasing the dependency level on different credit
rating agencies. A few have given their statements unhesitatingly that this Circular
is at a very precarious stage insofar as its applicability and enforceability are
concerned. The wide-ranging norms under this Circular will be implemented
within one month after the framework for listing all commercial papers and Debt
Mutual Funds is structured and made functional or by 1st January
2020, whichever is later. A fund manager didn’t even let that situation go
where doubt had been cast as a common practice regarding the financial
credibility of the issuers and this Circular will invariably add an extra layer
in the disclosures of the issuers’ financial data and profiles and will also
enhance transparency tier and the Debt Funds will now get a real thrust and
boost but that is more of an operational change rather than a change in
strategy, provisions, and methodology as many Commercial Paper issuers were
already issuing listed NCDs. Many schemes have an unambiguous write-up including
provisions laid down in their scheme information documents for remedying
various breaches and contraventions, therefore, no regulatory framework is
required on the same.
How It Ends?
The sublime principle in Circular is armoured with
multifaceted wings and weapons and the Circular has created a good notch from
the regulatory aspect as it brings about some much expected and much-awaited
tightening of the investment norms in Debt Funds market although some of the
major bugs remain unattended and not fixed yet.
SEBI is surely working on it and shall put the Circular on a
review table for a microscopic screening and scrutiny of the Circular where we
all will have a flawless and all-pervading, purpose serving, object-oriented
and centralised circular in force.
That day is nearby to welcome the Circular and stricture
with grace!!!
Contributed By – Ujjal Chattopadhyay
Designation – Senior Consultant
King Stubb & Kasiva,
Advocates & Attorneys
New Delhi | Mumbai | Bangalore | Chennai | Hyderabad | Kochi
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