Sebi tightens debt investing norms for mutual funds

The Securities and Exchange Board of India (Sebi) on Monday announced tighter norms governing mutual fund investments in debt securities. The regulator has reduced single security exposure, sector exposure and group exposure for debt schemes.

The move comes within months of a crisis at JPMorgan Asset Management Company due to a payment default on debentures by Amtek Auto.

The maximum a debt scheme can invest in the securities of a company has been reduced from 15 per cent to 10 per cent of the corpus. Single sector exposure for a scheme has been reduced from 30 per cent to 25 per cent.

The exposure to housing finance companies within the finance sector has been reduced to five per cent from the earlier 10 per cent.

Sebi said the tightening would help mitigate credit risks and would lead to a rise in diversification.

“It is a prudent move from the regulator, particularly when investors see debt schemes as safe instruments. By diversifying, risk will be reduced. Such measures will instil confidence in investors,” said G Pradeepkumar, chief executive officer, Union KBC Mutual Fund.

Assets under management of debt mutual fund schemes are nearly Rs 8 lakh crore.

Sebi has also asked fund houses to merge credit exposure limits for single issuers of money market instruments and non-money market instruments at the scheme level.

“The regulator has attempted to diversify the portfolio at an issuer, sector and group level. This is a positive for investors as they get a much more diversified portfolio. From an issuer’s perspective, the demand for some sectors such as non-bank financial companies will go down,” said Lakshmi Iyer, chief investment officer (debt), Kotak Mutual Fund.

Some mutual fund experts said more needed to be done than only pushing for diversification. “These are certainly good measures but a lot more needs to be done. The liquidity risk is a bigger issue, which has not been addressed. In most such crises investors tend to redeem units. There should be measures to expand, deepen and make the corporate bond market more versatile in order to make sure bonds are easily tradeable and there is no illiquidity,” said Kaustubh Belapurkar, director (fund research) at Morningstar India.

Securities and Exchange Board of India ( SEBI )