To safeguard investors’ interest, markets regulator Sebi on Monday tightened its norms for mutual funds’ exposure to riskier corporate bonds including by capping the investment limit in bonds of a single company at 10 per cent.
The single sector exposure limit would also be lowered from 30 per cent to 25 per cent, while group-level investment limits of 20-25 per cent have been also been introduced for the mutual funds investing in debt securities.
The issue of reducing the MF exposure limit for debt schemes caught Sebi’s attention after JP Morgan Mutual Fund got into troubles due to its exposure to debt securities of Amtek Auto, while a few other fund houses have also faced similar problems with regard to corporate bonds of a few other distressed firms.
At a meeting here on Monday, Sebi’s board undertook a review of the prudential limits on investments by mutual funds and approved a wide range of changes which would be applicable to all fresh investments by any new or existing scheme.
The fund houses would be given appropriate time to confirm that their schemes are in compliance with the new investment restrictions.
The steps will mitigate risks arising on account of high levels of exposure in the wake of events pertaining to credit downgrades, put mutual funds in a better position to handle adverse credit events.
It would also provide mutual fund investors with enhanced diversification benefits, the Securities and Exchange Board of India (Sebi) said in a statement after the board meeting. The Sebi board has approved amendment in Mutual FundsRegulations, 1996, which will reduce sector exposure limits of debt schemes to 25 per cent from current 30 per cent.
In the case of housing finance companies, the cap is an additional 10 per cent. Now, the regulator has decided to slash this to five per cent.
In addition, fund houses will not be able to invest more than 10 per cent of a scheme’s corpus in debt securities of a single company. However, it can be extendable to 12 per cent of net assets value (NAV) after trustee’s approval. Currently, the limit is 15 per cent.
The regulator will merge credit exposure limits for single issuer of money market instruments and non-money market instruments at the scheme-level.
Sebi will introduce group level limits for debt schemes through issuance and the ceiling would be fixed at 20 per cent of NAV extendable to 25 per cent of NAV after trustee approval.
All Government-owned PSU entities, PFI and PSU banks will be excluded from group level limits, Sebi said.
Trustees will “review exposure of a mutual fund, across all its schemes, towards individual issuers, group companies and sectors.
Trustee should satisfy themselves on the levels of exposure and confirm the same to Sebi in the half-yearly trustee report,” the regulator said.