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Sebi may tighten MFs’ risk monitoring practices

Sebi may tighten MFs’ risk monitoring practices
AMCs could be asked to form independent committees overseen by trustees to mitigate risks
Increasing fears of debt default in Corporate India may prompt the Securities and Exchange Board of India (Sebi) to nudge the trustees and sponsors of asset management companies (AMCs) to play a more active role in managing risks.
The regulator is deliberating on making it mandatory for fund houses to form internal risk assessment committees comprising key AMC personnel and external consultants, according to two people familiar with the matter. The functioning of the committee will be monitored by the trustees.

The need for better risk monitoring was discussed in a recent meeting between the mutual fund advisory committee and the regulator. This follows rising concerns over the exposure taken by debt schemes to lower-rated debt papers, which run the risk of sudden downgrades or defaults.

“An independent committee will be better able to carry out an in-depth analysis of the AMC’s investments,” said a person familiar with the matter.

Another sector official said: “At the end of the day, the trustees need to spell out exactly what money is at risk.”

Earlier this year, India Ratings & Research downgraded the credit rating of Ballarpur Industries, resulting in a steep fall in the net asset values (NAVs) of four of Taurus AMC’s debt schemes. In August 2015, two schemes of JP Morgan AMC saw a sharp fall in their NAVs after a ratings agency suspended coverage on Amtek Auto’s debt papers. In September that year, Amtek Auto defaulted on the re-payment on its debt papers.

In the past few months, Sebi has been asking fund houses for periodic disclosures of the portfolios of debt schemes and the details of downgraded securities. It has also asked AMCs to reduce their dependence on external credit rating agencies, and set up their own credit teams for better due diligence.

According to sources, the regulator is also keen on better labelling and classification of debt schemes. “Investors need to understand the nature of risks when they invest in debt schemes. For instance, the risk associated with a corporate bond fund that invests in AAA-rated papers is totally different from that which primarily invests in A-rated papers. The sub-categorisation needs to spell out these risks more clearly,” said one of the people quoted above.

In the past, the regulator has experimented with colour codes and ‘riskometer’ for differentiating products based on risk. Both the risk classifications were considered too basic by experts.

In a recent note, brokerage Ambit Capital had warned that bonds issued by non-banking finance companies (NBFCs) were being lapped up by the mutual fund sector and could push investors and the financial system to a risky situation where capital loss could become a reality. According to Ambit, in the five years from FY12 to FY16, NBFCs issued Rs 2,300 crore of non-convertible debentures (NCDs).

“In FY17, with no underlying improvement in the health of these issuers or of the Indian economy, the NCD issuance by NBFCs jumped to Rs 3,200 crore while the cost of these funds fell,” the note written in April observed.

As of August 31, 2017, mutual funds had a little over Rs 1 lakh crore in credit opportunity funds, which typically go down the credit curve in search of higher yields, according to Value Research. The average one-year returns of these funds stood at 9.1 per cent.
In 2014, Sebi had increased the net worth requirement of AMCs to Rs 50 crore from Rs 10 crore. Among other things, the move was aimed at ensuring that the AMCs had a sizeable corpus to meet their obligations in the case of sudden redemption requests arising out of corporate debt defaults or downgrades.

Risky Affair

Fear of debt defaults in corporate india may spark further tightening of risk mangement practices of MFs.

Trustees may be asked to play active role in risk management .
AMCs may be asked to form internal risk assessment committees.

Aims is to better gauge risks emanating out of the AMC's investements,especially in lower-rated debt papers.

Regulator keen on better labelling and classification of debtschemes.

In the past,colour codes and 'riskometer' was introduced to differentiate products based on risks.

Earlier this year,Ballarpur industries' downgrade led to a steep fall in NAV of 4 of Taurus AMC's debt schemes.

In Aug 2015,NAVs of 2 of JP Morgan AMC's schemes fell sharply after Amtek Auto defaulted on payments.

The Business Standard, New Delhi, 28th September 2017


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