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Sebi asks mutual funds to shift all investments to listed securities




With an aim to safeguard mutual fund investors from high-risk assets, regulator Sebi wants fund houses to shift all their investments to listed or to-be-listed equity and debt securities in a phased manner and reduce their exposure to unrated debt instruments from 25 per cent to only 5 per cent.

Exposure to risky debt securities has emerged as a major risk for the capital market investors, including those coming through the mutual fund space, and the regulator has been making efforts to enhance its regulatory safety net against such risks.

Taking forward certain decisions approved by Sebi’s board earlier in June, the regulator has now finalised the draft amendments to the prudential norms for mutual fund schemes for investment in debt and money market instruments.

Besides, some further amendments have been proposed for approval of Sebi’s board at its next meeting later this month, officials said.

A key fresh proposal is to reduce the existing overall limit for investment of mutual fund schemes in unrated debt instruments, except those for which specific norms are separately provided, from 25 per cent to 5 per cent.

Further, the existing provision of the single issuer limit of 10 per cent for investment in unrated debt instruments has been proposed to be dispensed with, an official said.

However, the official said these proposed limits may need to be reviewed periodically by Sebi after taking into account the market dynamics and participation of mutual funds in unrated debt securities from time to time.

Among other decisions which have been in-principle already approved by the Sebi board and need to be incorporated in the amended regulations, the valuation of debt and money market instruments based on amortisation would be dispensed with and would shift completely to mark-to-market valuation with effect from April 1, 2020.

Also, mutual funds would be permitted to accept upfront fees with disclosure of all such fees to valuation agencies and standard methodology for treatment of such fees would be issued by the industry body AMFI (Association of Mutual Funds in India) in consultation with Sebi.

Under the new proposed prudential framework, mutual funds would invest only in listed or to-be-listed equity shares and debt securities (including commercial papers) and this would be implemented in a phased manner.

Sebi would soon issue a circular on operational aspects of the proposal such as timelines, grandfathering of existing investments, exclusion of exposure in debt instruments such as interest rate swaps, etc.

The existing regulations allow a mutual fund scheme to invest a maximum of 10 per cent of its net asset value in unrated debt instruments issued by a single issuer while the total investment in such instruments is capped at 25 per cent.

However, pursuant to Sebi’s decision to allow mutual funds to invest only in listed securities, very limited number of instruments that are unrated would be eligible for investment by the mutual funds, as all listed debt instruments are mandatorily rated.

After excluding debentures, government securities, interest rate swaps, interest rate futures, repo on G-Sec and T-bills, the mutual funds’ investments in unrated debt instruments are mostly in fixed deposits, bills re-discounting (BRDS), mutual fund units, repo on corporate bonds, units of REITs/InvITs (Real Estate and Infrastructure Investment Trusts), etc.

However, Sebi already has separate investment norms for fixed deposits (FDs), mutual fund units, repo of corporate bonds and REITs/InvITs and the exposure to these instruments does not form part of the existing 25 per cent investment cap.

Excluding all these instruments, the total exposure of mutual funds in the remaining unrated debt instruments is mostly in BRDS, amounting to about Rs 2,870 crore as on March 31, 2019.

Besides, this investment is limited to just four mutual fund schemes and the average value of investments as percentage of the respective scheme’s asset under management was just about 3 per cent.

As a result, Sebi is of the view that the existing limit of 25 per cent for investment in unrated debt instruments would be too high as the residual investment permitted in this category might be relevant only for few instruments including BRDS.

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Sitharaman’s sops for NBFCs may perk up lending, ease liquidity stress



Illustration by Binay Sinha

To further ease the liquidity stress in the non-banking sector and nudge them to revive their lending activities, Finance Minister (FM) Nirmala Sitharaman on Friday announced a slew of measures for non-banking financial companies (NBFCs) and housing finance companies (HFCs). The government hopes this will result in more credit support for purchase of houses, vehicles, and consumption goods.

The government has provided additional support of Rs 20,000 crore to the stressed housing finance companies from National Housing Bank (NHB). With this, the additional liquidity support for the HFCs from NHB has gone up to Rs 30,000 crore.

In the Union Budget last month, the FM had encouraged public sector banks (PSBs) to buy high-quality pooled assets of NBFCs up to Rs 1 trillion for which the government would provide a one-time six-month partial credit guarantee for the first loss of up to 10 per cent.

The Reserve Bank of India (RBI) had also chipped in by tweaking banks’ bond-holding norms. This will allow banks to borrow an additional Rs 1.34 trillion exclusively for buying such pooled assets and giving loans to NBFCs. The FM on Friday said this partial credit guarantee scheme will be monitored at the highest level in each bank. Through this, it is expected that many of the assets will get quickly pooled and NBFCs will receive the necessary liquidity. “NHB has already settled some of the issues. NBFCs are receiving money from the banks and are moving towards funding,” said Sitharaman.

Sanjaya Gupta, managing director, PNB Housing Finance, said “This will support growth and ease the liquidity crunch. HFCs will now get an additional Rs 20,000 crore from NHB. The initiatives have potential to kick start the real estate sector.”

The government has also permitted NBFCs to use Aadhaar-authenticated bank KYC to avoid repeating the same process when a customer approaches it for credit. This has been a long-standing demand. The necessary changes in the Aadhaar regulations and Prevention of Money Laundering Act rules will be made, the FM said.

“This will streamline the process and also reduce frauds,” said Raman Aggarwal, chairman, Finance Industry Development Council.

The government has also asked PSBs and NBFCs to fast-track their collaboration to provide credit to micro, small and medium enterprises, small traders, self-help groups, and micro finance industry client borrowers.

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Market Updates

PACL Case: Sebi panel invites expression of interest for 28,974 properties




A committee headed by Justice R M Lodha has invited expression of interest (EoI) from prospective buyers for a total of 28,974 properties belonging to PACL Group.

Market regulator Sebi had set up a committee headed by former Chief Justice of India R M Lodha following a Supreme Court order to refund money to investors in the matter of PACL Group.

As per the notice issued by Sebi, the committee has divided the total 28,974 properties belonging to PACL group in four zones — east, west, north and south — with maximum properties being located in the southern zone.

Regarding PACL properties, the apex court’s order dated July 30 observed “we also leave it open to the committee to receive any further offers and to explore them after duly publishing a further notice on the website,” the notice said.

In pursuance of apex court’s order, the committee “invites Expression of Interest from prospective buyers clearly indicating therein, list of properties in each zone, its circle rate, the offer amount and other relevant details,” the Friday notice said.

“The proposal should be for properties in each zone aggregating in value not less than Rs 1,000 crore,” the notice added.

The notice further said that the last date of receipt of proposals is September 9.

PACL, also known as Pearl Group, had raised Rs 60,000 crore from public in the name of agriculture and real estate businesses and was found by Sebi to have collected these funds through illegal collective investment schemes over 18 years.

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Improved market access for domestic retail investors with Aadhaar-based kYC



Markets, Investors, Indices, Stocks

The government will allow Aadhaar-based KYC for domestic retail investors, and necessary amendments to the rules under the Prevention of Money Laundering Act will be issued.

Announcing a slew of measures to boost the economy, the government said the Depository Receipt Scheme 2014 is expected to be operationalised soon by Sebi. “This will give Indian companies increased access to foreign funds through American Depository Receipt (ADR)/ Global Depository Receipt (GDR),” she said.

In order to improve market access for the domestic retail investors, Aadhaar-based KYC will be permitted for opening of demat account and making investment in mutual funds. In this regard, necessary notification for amendments in PMLA rules would be issued.

Besides, steps would be taken with regard to offshore rupee market.

“To bring offshore rupee market to domestic stock exchanges and permit trading of USD-INR derivatives in GIFT IFSC, Ministry of Finance is working with RBI to introduce this measure shortly,” the government said.

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