Detailed Sebi guidelines on side-pocketing soon

Markets regulator Sebi will soon issue detailed guidelines on the creation of segregated portfolio or side-pocketing for debt and money market instruments. The Securities and Exchange Board of India (Sebi) also asked fund houses to strengthen their in-house credit risk assessment system instead of completely depending on rating agencies.

“There are benefits of side-pocketing like, stopping redemption pressure and preventing fund managers from selling the liquid assets at distress price among other points. However mutual funds should ensure that this facility is not misused and all the disclosures are made to investors in timely manner,” Sebi executive director SV Muralidhar Rao said at the CII Mutual Fund Summit in Mumbai on Tuesday.

The regulator will come out with detailed guidelines shortly, he added.

In its board meeting last week, Sebi had allowed mutual funds to create segregated portfolios or ‘side-pocket’ facility based on credit events with respect to debt and money market instruments subject to various safeguards. Side pockets separate stressed assets from other investments and cash holdings. Having them ensures that while some of the investor money in a debt mutual fund scheme linked to stressed assets gets locked until the fund recovers money from the stressed company, while investors are free to redeem their money from other investments.

The markets regulator also said that they are in discussion with various stakeholders to review and implement valuations guidelines for corporates bonds. The regulator will also soon bring out a consultation paper on uniform valuation methodology for pricing of corporate bonds, where they will prescribe guidelines for pricing corporate bonds, which shall be followed uniformly across all the mutual funds and evolve a supervisory and regulatory framework for pricing agencies, which would provide services related to pricing of corporate bonds to mutual funds.

Officials in the industry said improvements will be in two areas with regard to valuations for bonds and papers which have a maturity of less than 60 days and also the paper which downgraded to below investment grade.

Currently, debt funds have mark to market for the papers maturing above 60 days.

Securities and Exchange Board of India ( SEBI )