Sebi plans cap on MFs’ single-company exposure

28 Nov 2015


The Securities and Exchange Board of India (Sebi) is planning to introduce a sectoral cap and a single-company exposure limit for investments in corporate bonds by fixed income mutual fund (MF) schemes to mitigate excessive credit risks and prevent investors from losing money if the underlying bond turns illiquid.

''We are working on investment exposure norms for mutual funds. There could be some sort of sectoral cap or single-company investment limit (in terms of bonds). The new norms will be announced soon,'' Sebi chairman U K Sinha said on Friday on the sidelines of an event in Mumbai.

The move indicated by Sinha aims to prevent crises such as the recent one in two fixed income schemes under JP Morgan Asset Management (India) Pvt Ltd.

However, fund managers are apprehensive of Sebi imposing limits on where and how much they can invest in corporate debt. While Sebi's proposal comes in the wake of Amtek Auto defaulting on Rs190 crore worth of bonds held by JP Morgan-led funds, fund managers feel limits might backfire if they are not completely thought through.

According to market sources, Sebi is to likely bring down the investment limit for a fund in a single issue to 10 per cent from the current 15 per cent and restrict the fund's total exposure to debt from any one corporate entity. It might also consider reducing sectoral exposure to 25 per cent from 30 per cent.

These limits might be further pared depending on the credit quality. For instance, Sebi may allow a higher limit on bonds rated AAA over lower-rated categories, even if they be from the same issuer.

Investment managers of fixed income funds say that while diversifying risk is a good idea, Sebi must be careful on how it imposes limits. By imposing a limit on how much exposure a fund can take to a particular sector, funds will be forced to consider other less creditworthy sectors to comply with these limits.

Referring to the JPMorgan crisis, which followed a rating downgrade in its underlying bonds and a consequent erosion in the net asset values of the schemes, Sinha said the mutual fund industry was possibly not careful while managing debt schemes and there are certain areas in credit rating norms that need to be addressed.

''Mutual funds did not exercise adequate caution while investing,'' Sinha said. Also, Sinha said, credit rating agencies cannot suddenly suspend ratings of a company's bonds without appropriate and prior intimation. He urged more clarity and better disclosures on the ratings rationale.

''One day, the credit rating agency maintains a high investment grade for a given paper, and suddenly the rating is downgraded. Is it because the company didn't pay the credit rating agency or is it something more serious? Such processes need to be more streamlined and rating agencies must enable investors to take informed investment decisions,'' Sinha said.

Earlier, in October, the capital market regulator had asked asset management companies (AMCs) to stop depending entirely on credit rating agencies to assess corporate bond investments in their portfolios.

Rating agencies have been criticised for sharp and sudden downgrades of corporate debt, which led to a hit on the fixed income portfolio of MFs. For instance, a downgrade of Amtek Auto Ltd bonds led to a redemption crisis at JPMorgan AMC.

Following such instances, the market watchdog warned AMCs to avoid taking undue credit risks by investing in debt papers of companies that are saddled with loans and could face potential rating downgrades.

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