SEBI trims exposure limits for mutual funds in corporate bonds

The Securities and Exchange Board of India (SEBI) after a board meeting on Monday came out with sweeping changes in the way the Mutual Funds invest in corporate bonds.

The Board of Directors in a meeting deliberated on the proposals relating to review of prudential limits at issuer and sector level exposure limits. SEBI in its decision reduced the sector wise exposure limits for debt schemes to address concerns over the risks associated with their investments in distressed corporate bonds, which recently came to fore after Amtek Auto crisis.

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 like Unitech and JP Group. Also high levels of exposure pose serious concerns in the wake of recent credit downgrades.

The move was expected and was primarily taken to mitigate the risks arising on account of high levels of exposure in the wake of events pertaining to credit downgrades. In case of an adverse credit event pertaining to a company is perceived negatively by the investor community which do get reflected in the Net Asset Value (NAV) of the company in review. If the concerned Mutual funds holds the affected company in its portfolio the NAV dose get affected negatively as was in the case of JP Morgan’s exposure to Amtek Auto, thus the fund house facing redemption pressure from investors. Earlier, JP Morgan Mutual Fund had restricted redemptions from two of its debt schemes—Short Term Income Fund and India Treasury Fund. The move came in the wake of a decline in NAVs of the schemes due to fund house’s exposure to Amtek Auto’s debt papers.

The regulator in its latest move reduced the exposure limit to a single sector from the current 30 per cent of NAV to 25 per cent of NAV. It also reduced exposure limit provided for Housing Finance Companies (HFCs) in finance sector from 10 per cent of NAV to 5 per cent of NAV. 

The MF Trustees would review the exposure of a mutual fund, across all its schemes, towards group companies and sectors and confirm the same to SEBI in the half-yearly trustee report. The investment restrictions shall be applicable to all fresh investments by a new scheme or an existing scheme. Appropriate time shall be given for Asset Management Company (AMC) to confirm with the new guidelines.

The changes are expected to bring a much needed cheer to the investors as it would try to address the recent concerns raised by them in wake of credit events.