The Securities and Exchange Board of India (Sebi) in its board meeting on Wednesday allowed mutual funds to create segregated portfolios or ‘side-pocket’ facility based on credit events with respect to debt and money market instruments subject to various safeguards. Sebi also said that it will come out with a consultation paper on uniform valuation methodology for pricing of corporate bonds.
“Creating Segregated Portfolio may be optional for mutual funds, but approval of trustees is necessary for activating such a portfolio. Creation of Segregated Portfolio is a mechanism to separate distressed, illiquid assets from other more liquid assets in a mutual fund portfolio to deal with a situation arising due to a credit event. With a Segregated Portfolio, investors who may take the hit when the credit event happens shall get the upside of future recovery, if any,” said Sebi in a statement. The board has also noted the recommendations of Mutual Fund Advisory Committee.
“This decision was triggered by the recent crises in the non-banking finance companies (NBFCs) and that’s how it started. It is in the interest of retail investors that toxic assets are segregated from assets which are doing well so that net asset value (NAV) of normal assets are maintained and there is less redemption pressure. Institutions might redeem in such cases and retail investors will be left with poor portfolio, we think it is a time to introduce and it’s optional,” said Sebi Chairman Ajay Tyagi.
‘Side pockets’ separate stressed assets from other investments and cash holdings. Having them ensures that while some of the investor money in a debt mutual fund scheme linked to stressed assets gets locked until the fund recovers money from the stressed company, while investors are free to redeem their money from other investments. Sebi also said it will soon bring out consultation paper on uniform valuation methodology for pricing of corporate bonds, which shall be followed uniformly across all mutual funds.
“The improvements that we will expect will be in two areas with regard to, valuations for bonds and papers which have a maturity of less than 60 days and also the paper which downgraded to below investment grade. Right now the guidelines are very general based and we expect to improve,” said Whole-Time Member Madhabi Puri Buch, Currently, debt funds have mark to market for the papers maturing above 60 days.
The Sebi Board, in principle, approved the proposals for amendments to the Regulations pertaining to Institutional Trading Platform (ITP) in the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (ICDR Regulations). Platform to be renamed as Innovators Growth Platform (IGP). In order to be eligible for listing on the IGP, the issuer shall be a company which is intensive in the use of technology, information technology, intellectual property, data analytics, bio-tech or nano-technology to provide products, services or business platforms with substantial value.
For the startup listing, regulator have proposed changes that, 25 per cent of the pre-issue capital for at least a period of two years should be help by qualified institutional investors. Currently it is required to have 50 per cent of pre-issued capital held by qualified institutional investors. Regulator had also reduced the minimum trading lot size from Rs 2 lakh from the existing Rs 10 lakh the minimum number of allottees will be revised to 50 from the existing 200.
The Sebi board also decided that clubbing of investment for foreign portfolio investors ( FPIs) should not be done on the basis of beneficial ownership as Prevention of Money Laundering Act.
In order to expand the universe of companies to whom offer for sale (OFS) mechanism is available, presently being top 200 companies by market capitalisation, Sebi said that, OFS mechanism shall be available for shareholders of companies with market capitalisation of Rs 1,000 crore and above, with the threshold of market capitalisation computed as the average daily market capitalization for six months prior to the month in which the OFS opens. The Board discussed the proposal for allowing custodial services in goods underlying commodity derivative contracts in order to enable participation of institutional investors in commodity derivatives market. In this regard, the Board approved the proposed amendments to the SEBI (Custodian of Securities) Regulations, 1996.