SEBI issues a circular for revising the investment norms for mutual funds for investment in Debt and Money Market Instruments

Oct 04, 2019 | by Avantis RegTech Legal Research Team


The Securities Exchange Board of India (SEBI) on October 02, 2019, has reviewedthe investment norms for mutual funds for investment in Debt and Money Market Instruments, to protect the interests of investors in securities and to promote the development of, and to regulate the securities market.

•Investment in Listed and Unrated Debt instruments:

Mutual Fund Schemecannot invest in unlisted debt instruments like commercial papers except the Government securities, other money market instruments and the products which are used by the mutual funds for hedging purpose like interest rate swaps, interest rate futures, etc. 

The mutual funds are, however, allowed to invest in unlisted Non-Convertible Debentures(NCDs), in which the investment must not exceed 10 per cent of the overall debt portfolio of the scheme except they can only invest in NCDs with simple structure. It means that the NCDs must be with fixed and uniform coupon, fixed maturity period, without any options, fully paid up upfront, without any credit enhancements or structured obligations. Although, existing investments in unlisted instruments can be continued till maturity, extension of maturity, rolling over of existing investments and fresh investments should adhere to the stated regulation. Investment in unrated listed debt and money market instruments shall not exceed 5 % of net assets of the schemes.

•Restrictions on Investment in debt instruments having Structured Obligations / Credit Enhancements:

a.Investment of mutual fund schemes must not exceed 10 per cent of the debt portfolio in unsupported rating of debt instruments (without factoring in credit enhancements) below investment grade and supported rating of debt instruments (after factoring in credit enhancements), above investment grade. 

b.These limits are not applicable to investments in securitised debt instruments. Even the debt instruments having credit enhancements that are backed by equity shares directly or indirectly, must have minimum cover of 4 times the market value of such shares.

c. Further, investment in debt instruments with structured obligations or credit enhancements needs to be disclosed in the monthly portfolio statement of mutual fund schemes.

The provisions shall be effective for all fresh investments with effect from January 1, 2020.

•Sector level exposures Limits:

Previously, the sector level exposure was at 25 per cent and now it is imposed at 20 per cent and an additional exposure of 5 per cent of the net assets has been allowed for investments in securitised debt instruments based on retail housing loan portfolio and/or affordable housing loan portfolio. 

•Group level exposures:

The investments made in debt and money market instruments of group companies of both the sponsor and the Asset Management Company(AMC) should not exceed 10 per cent of the net assets. This limit can be extended up to 15 per cent of the net assets of the schemes with prior approval of the Board of Trustees. The provisions of Group level exposures will come into effect from October 01, 2019.

•Internal Credit Risk Assessment at the AMC:

Vide SEBI Circular No. SEBI/HO/IMD/DF2/CIR/P/2016/42 dated March 18, 2016, Para D is modified and it states that - AMCs may ensure that the investment in debt instruments having credit enhancements are sufficiently covered to address the market volatility and reduce the inefficiencies of invoking of the pledge or cover, whenever required, without impacting the interest of the investors. In case of fall in the value of the cover below the specified limit, AMCs should initiate necessary steps to ensure protection of the interest of the investors. The provisions of Internal Credit Risk Assessment at the AMCwill come into effect from October 01, 2019

[Circular no.- SEBI/HO/IMD/DF2/CIR/P/2019/104]

 


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