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| Capitalstars Investment Advisor |
Sebi on Thursday directed mutual funds to create segregated portfolios of unrated debt in case of default as the watchdog seeks to curb instances of distressed assets impacting investor returns.
The directive comes against the backdrop of liquidity woes in the NBFC sector raising concerns about mutual fund investment in such stressed companies.
Sebi in a circular said it has decided "to permit the creation of a segregated portfolio of unrated debt or money market instruments by mutual fund schemes of an issuer that does not have any outstanding rated debt or money market instruments".
This is allowed provided that a segregated portfolio of such unrated debt or money market instruments may be created only in case of actual default of either the interest or principal amount.
The creation of segregated portfolios is a mechanism to separate illiquid and hard-to-value assets from other more liquid assets in a portfolio.
It prevents the distressed assets from damaging the returns generated from more liquid and better-performing assets.
The regulator asked asset management companies (AMCs) to inform industry body Amfi immediately about the actual default by the issuer. Following this, Amfi will have to immediately inform the same to all AMCs.
Pursuant to the dissemination of information by Amfi about actual default by the issuer, AMCs may segregate the portfolio of debt or money market instruments.
Sebi said that the creation of a segregated portfolio should be optional and at the discretion of the AMC. It should be created only if the Scheme Information Document (SID) of the scheme has provisions for a segregated portfolio with adequate disclosures.
All new schemes to be launched will have the enabling provisions included in the SID for the creation of a segregated portfolio, it added.
In December 2018, Sebi had allowed mutual funds to create segregated portfolios with respect to debt and money market instruments.
It had said that segregated portfolio may be created, in case of a credit event at issuer level -- downgrade of a debt or money market instrument to ‘below investment grade' or subsequent downgrades of the instruments from ‘below investment grade' or similar such downgrades of a loan rating -by a registered credit rating agency.
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