With a mandate to safeguard investors’ interest, the Securities and Exchange Board of India (SEBI) has notified Circular No SEBI/HO/IMD/DF2/CIR/P/2016/35 dated 15 February 2016 (Circular) tightening its norms for mutual funds’ exposure to riskier corporate bonds.
Applicability of the Circular
The revised investment restrictions at the issuer, sector and group level would be applicable to all new schemes and fresh investments by existing schemes from the date of the Circular, while the existing schemes will have to comply with the new norms within a period of one year.
What are the changes introduced by the Circular?
In a previous amendment on 12 February 2016, SEBI had imposed restrictions on mutual fund investments in debt instruments comprising money market instruments and non-money market instruments issued by a single issuer which had not been rated below investment grade. This amendment has reduced the concentration limit of 15% of net assets value (NAV) of the scheme to 10% of NAV, which may be extended to 12% with the prior approval of the Board of Trustees and the Board of Asset Management Company.
Now, additional prudential limits have been imposed for sectoral exposure by debt oriented mutual funds. Exposure limits to a single sector have been reduced from 30% to 25% and additional exposure limits provided for Housing Finance Companies (HFCs) in finance sector have been reduced from 10% to 5%. The additional exposure to such securities issued by HFCs has to be rated ‘AA’ and above and these HFCs should be registered with the National Housing Bank (NHB). The total investment/ exposure in HFCs shall not exceed 25% of the net assets of the scheme. Investments in Banks Certificates of Deposit (CDs), Collateralized Borrowing and Lending Obligation (CBLO), Government Securities (G-Secs), Treasury Bills (TBills), short term deposit of commercial banks and ‘AAA’ rated securities issued by Public Finance Institutions and Public Sector Banks are excluded from these limits.
A limit of 20% (25% with the prior approval of the Board of Trustees) of the net assets of the scheme has also been introduced for mutual funds investing in debt securities for group-level investment (other than those in securities issued by Public Sector Undertakings, Public Financial Institutions and Public Sector Banks). “Group” for this purpose has the same meaning as under Regulation 2 (mm) of SEBI (Mutual Funds) Regulations, 1996 and includes an entity, its subsidiaries, fellow subsidiaries, its holding company and its associates.
The Circular is intended as a step towards providing mutual fund investors enhanced diversification benefits by reducing concentration risk. The measures are as a result of the recent Amtek Auto events. With the approaching financial year-end, the mutual fund industry is in redemption mode and new investments will need to be carefully calibrated to comply with the enhanced guidelines.