Sebi tightens norms for liquid MFs, takeover regulations of firms under IBC

The Securities and Exchange Board of India (Sebi) tightened the valuation methodology for liquid mutual funds (MFs) and did away with the open offer exemption given to those seeking to acquire assets undergoing insolvency resolution.

To make sure liquid schemes reflect the underlying portfolio risks, Sebi has said all debt papers with maturity of 30 days or more to be marked to market. Earlier, fund houses didn’t have to do so for securities that had less than 60-day maturity.

The move comes in light of the redemption risks faced by liquid schemes after the Infrastructure Leasing & Financial Services (IL&FS) crisis rattled markets.

Sebi has also restricted open offer exemptions to only scheduled commercial banks and financial institutions in debt restructuring cases. The exemptions will not be available for acquisitions of shares by “persons” other than lenders in case of allotment by the target Company or purchase from lenders. The move would impact those corporates who are undergoing resolution through the asset reconstruction companies (ARCs).

At present, ARCs who take control of sick companies are permitted to convert a portion of debt into shares of the borrower company as a measure of asset reconstruction. This may potentially derail the talks between UAE-based Etihad and debt-saddled Jet Airways. Etihad had asked waiver from the open offer for increasing its stake from the existing 24 per cent.

According to the resolution plans, the banks led by State Bank of India are likely to hold 51 per cent stake in Jet.

Open offer exemption given to companies undergoing resolution plan under Insolvency and Bankruptcy Code (IBC) will continue in supervision of National Company Law Tribunal (NCLT).

ARCs looking to convert debt into equity, too, would be hit. “ARCs and other lenders (except scheduled banks) who hold bad loans of firms that have gone into the old corporate debt restructuring process won't be able to avail the takeover code and pricing exemption anymore. Takeover code exemption for those undergoing insolvency resolution continues to apply, which is good," said Bhavin Shah, financial services, tax leader, PwC India.

Sebi also said that only a court or a tribunal is allowed to provide any such exemptions. Experts said the move would increase the cost of acquisition for those buying listed stressed firms.