Context

SEBI tightens norms for MFs and pledged shares to boost investor confidence

About

What new changes have been introduced by SEBI?

• More checks and balances for debt mutual funds (MFs) to secure investors and stem systemic risks.
• Increased security cover for loans against shares, brought down sectoral investment limits, and mandated certain schemes to have a fifth of their exposure in government securities (g-sec).
• A debt scheme can invest up to 20 per cent of its assets instead of 25 per cent in one sector. The additional 10 per cent exposure allowed in the case of housing finance companies (HFCs) has to be cut to 5 per cent.
• All liquid schemes will have to deploy at least 20 per cent of their assets in liquid assets such as cash, government securities (g-secs), and Treasury bills. Earlier, there was no such requirement.
• Changed the valuation methodology for debt and money market instruments to mark-to-market, doing away with amortisation.
• Directed MFs to have cover of four times for loans against shares. Earlier the cover provided by MFs varied between 1.5 times and 2 times.

  What concerns have been raised by SEBI?

• Defaults or payment deferments by high-profile corporate groups including Zee and DHFL have plagued the Rs 25-trillion Mutual Fund industry.
• SEBI also criticised the move of certain fund houses to enter into the so-called standstill agreement with certain groups.
• SEBI stated that MFs are not banks and they are investing, not lending that is why it does not recognise any such standstill agreement.

Key decisions Debt MF tightening Sectoral limit cut from 25% to 20% Additional exposure to HFCs cut from 15% to 10% Liquid schemes asked to invest at least 20% in G-secs, T-bills Exit load on liquid scheme investors for investments up to 7 days Security cover of 4 times for loan against shares DVR framework Only tech firms to be allowed to issue shares with superior rights (SRs) SRs to have sunset clause of 5 years; SR ratio to be maximum 10:1 to ordinary shares Pledged share disclosures Detailed disclosure if promoter pledging crosses 20% of total equity or 50% of promoter Definition of pledging widened to cover all types of encumbrance Royalty norms Royalty threshold relaxed from 2% to 5% Cos whose royalty/brand usage payments exceed 5% of turnover need to seek minority shareholder approval Insider trading norms Trade window to be relaxed for corporate activity such as block deals, QIPs

The Securities and Exchange Board of India (SEBI)

• It is the regulator for the securities market in India. It was established in 1988 and given statutory powers on 30 January 1992 through the SEBI Act, 1992.

Powers

• To approve by−laws of Securities exchanges.
• To require the Securities exchange to amend their by−laws.
• Inspect the books of accounts and call for periodical returns from recognized Securities exchanges.
• Inspect the books of accounts of financial intermediaries.
• Compel certain companies to list their shares in one or more Securities exchanges.
• Registration of Brokers and sub-brokers.

Conclusion

• The move could lead to volatility in liquid schemes, but at the same time the regulator has taken a comprehensive view by ensuring enough liquidity and prudent risk-management norms in these schemes. Earlier, amortisation allowed uneven valuations of the same debt papers across schemes.
• Bringing mark-to-market for all securities will make sure that the risk is transparently reflected in schemes’ NAV on a daily basis. Industry officials added tightening norms for liquid schemes could push investors to move towards larger schemes or larger fund houses.
• The measures taken by SEBI will help revive the confidence of investors, especially those investing in debt MFs.