SEBI tightens investment norms for mutual funds

SEBI chairman Ajay Tyagi

MUMBAI: Securities and Exchange Board of India (SEBI) has tightened investment norms for mutual funds in the liquid, money market and debt securities after the credit market developments affected fund values and redemptions.

Mutual funds henceforth can invest only in listed NCDs (Non-Convertible Debentures), and SEBI has given time till September 2020 to move to the new norm in a phased manner. Same would also apply to Commercial Paper investments. In case of equity schemes too, SEBI has said that investments can be made only in listed or to-be-listed equity shares.

On the recent case of some mutual funds that delayed or limited redemption in the fixed maturity plans (FMP), SEBI chairman Ajay Tyagi said adjudication process is on in case of the two mutual funds. Kotak Mutual Fund and HDFC Mutual Fund were issued show cause notices over their standstill agreement with Essel Group, which led to the changes in their FMP valuation and payments.

“We do not approve of such standstill arrangements. We will take action in future if there are such instances,” Tyagi said.

SEBI has also tweaked the sectoral exposure norms for debt funds – exposure to single sector reduced from 25 to 20 per cent. Exposure to housing finance companies shall be restructured to 10 per cent in HFCs and 5 per cent exposure in securitised debt based on retail housing loan and affordable housing loan portfolios, SEBI said.

Liquid funds have been asked to hold at least 20 per cent in liquid assets such as cash, government securities, T-bills and Repo on Government Securities. Liquid and overnight schemes will not be allowed to invest in short term deposits, debt and money market instruments having structured obligations or credit enhancements.

Investors wanting to exit a liquid fund within 7 days would have to pay a graded exit load. Investment in debt and money market investment having credit enhancement is limited to 10 per cent as far as group limits are concerned and 5 per cent of the portfolio. Moreover, exposure to debt instruments with credit enhancement has to be secured by four times cover by mutual funds.