The Securities and Trade Board of India (Sebi) on Wednesday issued curbs on mutual fund (MF) investments in debt devices with particular options resembling extra tier-I (AT1) bonds.

In a round, the markets regulator stated no MF shall, below all its schemes, personal greater than 10 per cent of AT1 bonds issued by a single issuer.

Additional, on the scheme stage, the publicity to such devices shall be lower than 10 per cent of the overall property and fewer than 5 per cent in direction of a single issuer. The restrictions will apply to all debt devices which have particular options resembling subordination-to-equity and convertible-to-equity upon the set off of a pre-specified occasion for loss absorption.

At current, there aren’t any specified funding limits on such devices, that are construed to be riskier than different debt devices. Final yr, a number of MFs had been caught on the flawed foot owing to their investments in YES Financial institution’s AT1 bonds, which had been written down earlier than fairness following the RBI’s rescue plan for the lender.

“The announcement will additional enhance the chance administration framework for the MF trade,” stated Mahendra Kumar Jajoo, CIO (Fastened Revenue) at Mirae MF.

In response to PRIME Database, practically Rs 37,000 crore was invested by MFs in perpetual bonds, as of January.

Business gamers stated current holdings is not going to be impacted, provided that Sebi has allowed grandfathering.

“The investments of MF schemes in such devices in extra of the bounds… could also be grandfathered and such MF schemes shall not make any recent funding in such devices till the funding comes under the required limits,” Sebi has acknowledged.

Perpetual bonds are mounted revenue securities with no maturity date. These bonds aren’t redeemable by the issuer. An everyday coupon, which is often larger than different debt devices, is paid on these bonds by the issuer, most of that are banks. Sebi additionally acknowledged that debt schemes that put money into such devices must be sure that their scheme info doc has provisions for a segregated portfolio.

Additional, MFs must be sure that the monetary stress of the issuer and the compensation capabilities of the issuer is sufficiently mirrored within the valuation of the securities.

Sebi has additionally directed that close-ended debt schemes shall not put money into perpetual bonds. The round comes into impact from April 1.

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