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Sebi tightens norms for MF exposure to riskier bonds

MF investment cap with a single issuer cut from 15% of net asset value to 10% of NAV.

Tightening the norms for mutual funds’ exposure to riskier corporate bonds, the Securities and Exchange Board of India (Sebi) on Monday reduced the investment cap in the bonds of a single issuer from 15 per cent of net asset value (NAV) to 10 per cent of NAV.

The board of the market regulator, at a meeting on Monday, also unveiled the disclosure requirements for issuance and listing of Green Bonds, provided an exit route for dissenting shareholders of a company which has raised funds from the public and approved the introduction of primary market debt offering through private placement on electronic book.

The regulator decided to cut the exposure limit for debt schemes after JP Morgan Mutual Fund got into troubles due to its exposure to debt securities of Amtek Auto which defaulted on repayment. Many other fund houses also faced problems with corporate bonds of distressed firms. The single sector exposure limit would also be lowered from 30 per cent to 25 per cent, while group-level investment limits of 20-25 per cent have been also been introduced for the funds investing in debt securities.

The earlier extended limit of five per cent of NAV — subject to approval from mutual fund trustee — has also been brought down to two per cent taking the maximum investment to 12 per cent. Moreover, additional exposure limit provided for housing finance companies (HFCs) in finance sector has also been halved from 10 per cent of NAV to five per cent of NAV.

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The Sebi has introduced group level limits for debt schemes through issuance of appropriate circular and the ceiling be fixed at 20 per cent of NAV extendable to 25 per cent of NAV after trustee approval. According to the Sebi, a group, includes an entity, its subsidiaries, fellow subsidiaries, its holding company and its associates. All government owned PSU entities, PFI and PSU banks have been excluded from group level limits. Trustees have been entrusted with the responsibility of reviewing exposure of a mutual fund, across all its schemes, towards individual issuers, group firms and sectors.

The steps will mitigate risks arising on account of high levels of exposure in the wake of events pertaining to credit downgrades, put mutual funds in a better position to handle adverse credit events and provide mutual fund investors with enhanced diversification benefits, Sebi said. Releasing the norms for Green Bonds, Sebi said the new norms also provide for requirement of independent third party reviewer, certifier or validator for reviewing, certifying and validating the pre-issuance and post-issuance process including project evaluation and selection criteria, but this has been kept optional.

Sebi also said that an escrow account would not be mandatory for issuance of such bonds, but issuer will have to provide the details of the systems and procedures to be employed for tracking the proceeds of the issue, including the investments made and earmarked for eligible projects. The same would need to be verified by the external auditors. Issuer would have to make disclosures including use of proceeds, list of projects to which Green Bond proceeds have been allocated in the annual report and periodical filings made to the stock exchanges

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The Sebi also cleared an exit opportunity to dissenting shareholders of a company while raising money. Under Companies Act, 2013, a company, which has raised money from public through prospectus and still has any un-utilised amount out of the money raised, should not change its objects for which it raised the money through prospectus or vary the terms of a contract referred to in the prospectus unless a special resolution is passed by the company. The Act also provides that dissenting shareholders, should be those shareholders who have not agreed to the proposal and they should be given an exit opportunity by promoters and shareholders having control over the firm.

The Sebi board also approved introduction of “primary market debt offering through private placement on electronic book”. It would help in improving efficiency of the price discovery mechanism against over-the-telephone market.

First published on: 12-01-2016 at 02:22 IST
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