In a bid to protect the interest of debt mutual fund investors, the Securities and Exchange Board of India is expected to bring down the exposure limit for debt-oriented mutual fund schemes to the financial services sector from the existing overall limit of 40 per cent.
In another move the Sebi is also expected to introduce a norm for mutual funds that will require them to seek collateral of over two times in cases where they lend money to promoters against their shares.
Currently, while the debt mutual fund schemes are allowed to have exposure of up to 25 per cent at a sector level, they are also permitted to have an additional exposure of up to 15 per cent in housing finance companies.
This is, however, set to be reduced as industry sources say that the regulator is concerned over high exposure of debt MF schemes to NBFCs and HFCs that are facing liquidity issues and a decision is likely to be announced soon. Another source confirmed that both the issues are there on the agenda and are likely to be taken up in the scheduled meeting on July 2, 2019.
In February 2017, the SEBI issued a circular increasing the additional exposure limit for debt oriented MFs into securities issued by HFCs from 10 per cent to 15 per in a bid to support funding for the affordable housing segment.
The Sebi circular of Feb 2017 said, “Presently, the guidelines for sectoral exposure in debt oriented mutual fund schemes put a limit of 25 at the sector level and an additional exposure not exceeding 10 per cent (over and above the limit of 25 per cent) in financial services sector only to HFCs. In light of the role of HFCs especially in affordable housing … it has now been decided to increase additional exposure limits provided for HFCs in financial services sector from 10 per cent to 15 per cent.”
Regulator’s move may push MFs to be more cautious
While MF exposure to debt papers of troubled NBFCs and HFCs has resulted into decline in returns for investors of several schemes across various mutual funds, the Securities and Exchange Board of India move to reduce overall sectoral exposure may push them to be more cautious while investing and picking the right mix of papers without taking undue risk.
Industry sources say that while the regulator had permitted higher exposure limits for MFs into HFCs so as to push retail demand in affordable housing segment, it has been seen that many housing finance companies have instead increased their lending to real estate companies and their projects, thereby exposing the MF investors to higher risk. Hence, Sebi may now reduce the exposure limit. Another source, however, said, “Sebi is very conscious of the fact that HFCs should not be deprived of funds, so we have to see what it finally decides to do.”
On the other hand, while several mutual funds have been offering loan against shares to promoters of companies, the regulator is likely to step in with stringent norms for such lending in light of the recent episode where fixed maturity plans of several of mutual funds came under pressure on account of their exposure in two Zee Group companies— Konti Infra and Edisons Utility. The MFs provided funds to the Zee Group promoters against their holding in Zee Entertainment.
While fund houses— stuck with investments in Zee Group companies — maintained that their exposure to Konti Infra & Edisons Utility were secured by around 1.5 times cover of Zee Entertainment shares, a source told that Sebi is expected to make a mandatory collateral requirement of at least two times the exposure, in order to safeguard the interest of investors.
Over the last nine months debt-oriented mutual fund schemes have come under pressure on account of their exposure to NBFCs and HFCs that are facing liquidity pressure and have also seen a significant downgrade by the credit rating agencies.
While it started with the default by several IL&FS group companies in September 2018, several companies in the financial services space have witnessed a downgrade of their debt papers by the CRAs.
In several cases, Debt MF schemes having exposure to such NBFCs and HFCs saw a sharp decline in their net asset value, thereby eating into the capital and returns of the investors.
The NAV per unit is the market value of securities of a scheme divided by the total number of units of the scheme on any particular date.