Markets regulator Sebi on Tuesday allowed mutual funds to invest in unlisted non-convertible debentures (NCDs) up to a maximum of 10 per cent of the debt portfolio of a scheme in a phased manner.

This would be subject to such investments in unlisted NCDs having simple structures (with fixed and uniform coupon, fixed maturity period, fully paid up upfront, without any credit enhancements) being rated, secured and with monthly coupons.

From March 31, 2020, Sebi said that the maximum investment in unlisted NCDs will be 15 per cent of the debt portfolio of the scheme and the investment limit will be 10 per cent from June 2020, the regulator said in a circular.

"The existing investments of mutual fund schemes in unlisted debt instruments, including NCDs, may be grandfathered till maturity date of such instruments," it added.

These measures are aimed at enhancing transparency and disclosure for investment in debt and money market instruments by mutual funds.

Besides, Sebi said "all fresh investments by mutual fund schemes in commercial papers (CPs) would be made only in CPs which are listed or to be listed with effect from one month from the date of operationalization of framework for listing of CPs or January 1, 2020, whichever is later".

Further, the regulator has reduced the existing overall limit for investment of mutual fund schemes in unrated debt instruments, except those for which specific norms are separately provided, to 5 per cent. Currently, the limit is 25 per cent.

This will be effective from January 1, 2020 for all fresh investment.

Sebi said investment of mutual fund schemes in debt instruments having structured obligations or credit enhancements "shall not exceed 10 per cent of the debt portfolio of the schemes and the group exposure in such instruments shall not exceed 5 per cent of the debt portfolio of the scheme".

"Investment in debt instruments, having credit enhancements backed by equity shares directly or indirectly, shall have a minimum cover of four times considering the market value of such shares," Sebi said.

The regulator asked mutual fund houses to 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, fund houses should initiate necessary steps to ensure protection of the interest of the investors, it added.

Sebi said that details of investments in debt instruments having structured obligations or credit enhancement features should be disclosed distinctively in the monthly portfolio statement of mutual fund schemes.

With regard to sector level exposure limits, Sebi has reduced such limits to 20 per cent from 25 per cent.

The additional exposure limits provided for housing finance companies (HFCs) in financial services sector has been now capped at 10 per cent as against the current 15 per cent.

"Further, an additional exposure of 5 per cent of the net assets of the scheme has been allowed for investments in securitised debt instruments based on retail housing loan portfolio and/or affordable housing loan portfolio. However the overall exposure in HFCs shall not exceed the sector exposure limit of 20 per cent of the net assets of the scheme," it added,

With regard to group level exposure limit, Sebi said that the investments by debt mutual fund schemes in debt and money market instruments of group companies of both the sponsor and the mutual fund house shall not exceed 10 per cent of the net assets of the scheme.

Such investment limit may be extended to 15 per cent of the net assets of the scheme with the prior approval of the board of trustees.

In order to ensure that mutual funds are able to carry out their own credit assessment of assets and reduce reliance on credit rating agencies, Sebi asked fund houses to have an appropriate policy and system in place to conduct an in-house credit risk assessment or due diligence of debt and money market instruments at all points of time -- before investing in such instruments -- and also on continuous basis in order to have proper assessment of the credit risk of the portfolio.

Further, the internal policy should have adequate provisions to generate early warning signals (including yield based alerts) on deterioration of credit profile of the issuer.

"Based on the alerts generated, the AMCs (asset management companies) shall take appropriate measures and report the same to trustees," it added.

The new group level exposure limit as well as Sebi's framework related to internal credit risk assessment at the AMC "shall be effective from 30th day from the date of this circular". #casansaar (Souce - PTI, Economic Times, SEBI)