Sebi sets limit on MF investment in debt with special features, perpetual bonds

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The Securities and Trade Board of India (Sebi) in a round as we speak set a restrict of 10% of AUM on mutual fund funding in debt with particular options resembling debt that converts to fairness. This contains Further Tier 1 (AT 1) and Further Tier (AT2) bonds, the regulator specified. Funding in a single issuer of such debt can’t exceed 5% of belongings. Funds with such investments and even enabling provisions for such investments ought to allow facet pocketing of their schemes, the regulator stated. Nonetheless, current investments above the boundaries can be grandfathered (permitted to proceed) and the restrict will solely apply to recent investments. The round will come into impact from 1st April 2021.

AT1 or AT2 bonds are popularly generally known as ‘perpetuals’ since they don’t have a set maturity date though banks can ‘name them in’ (repay them) at sure intervals. Such bonds are additionally designed to soak up the losses, if the financial institution’s capital dips beneath particular ranges because of excessive ranges of NPAs (non performing belongings) as an example. This went into impact throughout the Sure Financial institution disaster in early 2020 when perpetuals written by Sure Financial institution had been written down and mutual funds holding them confronted losses. The round additionally requested mutual funds to allow facet pocketing in the event that they maintain such debt with particular options. Aspect pocketing is the creation of a separate portfolio in lieu of dangerous debt. This enables buyers to exit the remaining a part of the scheme with out giving up on the prospect of restoration within the debt. In accordance with the Sebi round, a conversion of such particular bonds to fairness could be a set off for facet pocketing such debt, if the mutual fund desires to create a facet pocket.

“I do not assume this can be a serious problem for many mutual fund schemes. I believe banking and PSU debt funds will see some affect as they’re required to take a position 80% of their belongings in debt issued by banks and public sector enterprises,” stated Arvind Chari, Chief Funding Officer (CIO) at Quantum Advisors India. The round additionally laid down norms for valuation of perpetuals, stating that the maturity of such bonds shall be taken as 100 years. The regulator additional barred shut ended mutual funds from investing in such bonds.

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