SEBI tightens norms for mutual fund investments

In a reaction to a series of credit-related events that put investor money at risk, markets regulator Securities and Exchange Board of India (SEBI) tightened norms on investments by mutual funds (MFs).

Vowing to take action against MFs getting into standstill agreements with the promoters of companies, SEBI Chairman, Ajay Tyagi said, “We don’t recognise any such standstill agreements. MFs are not banks and there is nothing called ‘standstill’. They (MFs) are investing rather than lending and some of these restrictions have been put to bring in more discipline.”

Last month, the markets watchdog had questioned the legality of an agreement between some fund houses and the Essel Group, giving the business house time till September to repay its dues.

Early this year, the Anil Ambani-led Reliance Group had reached an understanding with more than 90% of its lenders to avoid sale of any stock pledged by the promoters until September 30.

This was despite the collateral cover shrinking and margins contracting following an unprecedented fall in share prices of the group firms.

SEBI is also looking into the recent stake sale by Emami promoters in the company to raise ₹1,600 crore from a group of investors, including SBI Mutual Fund.

Announcing a slew of reforms after its board meeting, Mr. Tyagi said that there was a need to improve enforcement on all fronts.

SEBI’s board had decided on key reforms over liquid funds, credit rating firms, promoters’ pledge of shares, and royalty payments.

SEBI said MFs will now be mandated to invest in only listed non-convertible debentures. All fresh investments by MFs in commercial papers (CPs) and equities will also be allowed only in listed securities and liquid mutual fund schemes will have to hold at least 20% in liquid assets.

Amit Singh, CEO, Investica, an online platform for investing in mutual funds said, “Today’s SEBI meeting has created a tighter framework for debt mutual funds which will ensure that investors are not exposed to undue risk. By making it mandatory to invest in listed NCDs and CPs, SEBI has taken a step towards ensuring the liquidity of the instruments.

Valuation of securities in debt funds will now be on mark-to-market value and hence, there will uniformity across the industry with fair valuation of each debt security.”

“The cap on sectoral limit of 25% shall be reduced to 20%. The additional exposure of 15% to HFCs shall be restructured to 10% to HFCs and 5% in securitised debt,” said SEBI in a statement.

In a further tightening, promoters, promoter groups and persons acting in concert (PACs) will need to disclose the reason for creating an encumbrance as soon as 20% of their share capital is leveraged.

SEBI also approved the framework for issuance of differential voting rights (DVRs) and introduction of superior voting rights for tech companies, which will be effective from July 01, 2019.

Welcoming SEBI’s move to allow DVRs for Indian tech companies, Bhavish Aggarwal, founder, Ola, in a tweet said, “I‘m certain this will encourage Indian companies to list within the country, backed by our own people. Made in India businesses and entrepreneurs can control their destiny and build for the world!.”

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