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Do homework avoid bad debt Sebi to MFs

Says cut reliance on ratings, do research before investment
The Securities and Exchange Board of India ( Sebi) has asked mutual fund ( MF) managers not to invest in debt paper solely based on credit rating.
The capital markets regulator has called for more scrutiny, based on detailed research, amid a rise in the banking systems stressed assets. The move is a fallout of the problems faced by JPMorgan MF on account of its investment in Amtek Auto’s debt, later downgraded by rating agencies.
Sources say Sebi is concerned over MFs’ exposure to poor quality corporate paper and is asking them to remain careful. It has written to heads of all fund houses for vigilance on investment in corporate paper. And, asked fund houses for details of the securities which have been downgraded after their investments.
Sebi has specifically asked fund houses to reduce concentration risk in their fixed income portfolios, said people in the know. By the norms, a fixed income scheme can invest up to 15 per cent in a single nonconvertible debenture, up to 20 per cent with approval of the fund house’s trustees. A debt scheme can have exposure of up to 30 per cent to one sector.
Among measures mulled by Sebi are changes to the disclosure and pricing norms for Sources said Sebi is also worried about MFs exposure to Jindal Steel & Power’s debt, recently downgraded by rating agency ICRA.
“We will hold consultations with market participants and the Mutual Fund Advisory Committee to determine whether there is a need to revisit the rules,” said a source.
JPMorgan had decided to restrict redemptions in two of its schemes, due to exposure to the illiquid Amtek Auto paper. The regulator wants no repeat two debt schemes of JPMorgan have invested, was downgraded by one rating agency, while another suspended coverage.
In September 2012, Sebi had asked fund houses to cut their exposure to a single sector to 30 per cent. “ AMCs shall ensure that total exposure of debt schemes of MFs in a particular sector ( excluding investments in bank CDs, CBLO, G- Secs, T- Bills and AAA- rated securities issued by public financial institutions their circular.
Currently, the domestic MF sector has debt assets worth nearly Rs.9 lakh crore, a third of which is into corporate debt. Although primary issuances in the corporate debt market are high, there is little liquidity in the secondary market, a complication in terms of pricing and trading of these bonds.
Business Standard, New Delhi, 16th Sept. 2015

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