MF investment in a firm’s debt capped at 10% of scheme’s NAV

Our Bureau Updated - January 19, 2018 at 03:16 PM.

Move to check exposure to riskier assets, says SEBI

SEBI on Monday announced new caps on the amount that can be invested by mutual fund firms in debt instruments issued by companies. The reduction in cap is aimed at mitigating risks after the Amtek Auto episode where JPMorgan Asset Management Co was forced to restrict redemptions in two of its schemes due to a downgrade of bonds issued by the firm.

The securities regulator has said that debt-based mutual funds cannot invest more than 10 per cent of the net asset value of any scheme issued by a single entity. The investment limit can be extended to 12 per cent of the scheme’s NAV with the approval of the trustee of the fund house, SEBI said in a statement following a board meeting on Monday.

Until now the cap was at 15 per cent with a provision to extend it by another 5 per cent. In addition, SEBI has reduced the exposure limit for an MF scheme in a single sector to 25 per cent of the fund’s NAV, from 30 per cent at present.

Halves additional limit
To reduce risks associated with the real estate sector, the additional exposure limit provided for housing finance companies in the finance sector has also been halved to 5 per cent of NAV from 10 per cent.

CVR Rajendran, CEO, Association of Mutual Funds of India, said the reduction in the limits of debt exposure was in line with the industry body’s recommendations. However, the limit on debt exposure to housing finance companies at 5 per cent (from the earlier 10 per cent) was not part of the industry recommendations.

Group level limits “We have to wait for more details to see how this will be implemented since housing finance companies and non-banking finance companies are large issuers of debt papers,” Rajendran said.

SEBI has introduced group level limits for debt schemes for which the ceiling has been fixed at 20 per cent of NAV, extendable to 25 per cent of NAV with trustee approval. All government-owned banks and PSU entities have been excluded from group level limits.

Tejesh Chitlangi, Partner, IC Legal, said, “The single issuer investment limit under the existing norm was on a higher side keeping in view the public nature of a mutual fund vehicle. Similarly, in the absence of any group level exposure norms, the single issuer limit had the potential to be violated in spirit. The proposed changes will ensure risk diversification in letter and spirit and coupled with possible tighter regulations on credit rating agencies, will minimise adverse credit events.”

Published on January 11, 2016 12:53