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Last Updated : Nov 13, 2019 04:05 PM IST | Source: Moneycontrol.com

SEBI disciplines valuation treatment of unrated securities

Experts feel that SEBI has now completed the circle of transparency by going ahead and issuing an additional circular on November 7 regarding the segregation of asset provisions for unrated debt papers

The Securities Exchange and Exchange Board of India (SEBI) initiated action in the valuation treatment of debt securities in case of credit events of the downgrade of a corporate debt paper by issuing two circulars, one in December 2018 on credit event and the other in November 2019 on unrated securities.

Both the circulars were in response to liquidity woes in the NBFC sector and downgrades of multiple debt papers which had raised concerns about mutual fund investment in stressed companies such as Infrastructure Leasing & Financial Services Limited (IL&FS), Essel Group, and Dewan Housing Finance Ltd (DHFL).

After the credit crisis in IL&FS, and DHFL, SEBI issued a comprehensive circular in December 2018 to allow mutual funds to segregate their holdings in stressed securities. Known as side-pocketing in mutual fund parlance, this refers to a practice where fund houses isolate risky assets from the rest of their holdings and cap redemption in the segregated assets.

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Experts feel that SEBI has now completed the circle of transparency by going ahead and issuing an additional circular on November 7 regarding the segregation of asset provisions for unrated debt papers.

“SEBI has brought in a clarity by issuing two circulars giving cut off points for both rated and unrated papers during credit event and when the debt paper should be considered as a default,” said Mahendra Jajoo, Head-Fixed Income, Mirae Asset Mutual Fund.

According to the data on ACE MF, mutual funds invested Rs 69,805 crore as of the September-end in unrated papers while the investments stood at Rs 29,951 crore at the end of October.

Fund managers said that, at an industry level, this will create an equal treatment for all kinds of debt papers whether rated or unrated.

For unrated papers, SEBI now mandates that such papers be reported immediately by mutual funds in actual default to AMFI which shall disseminate to the entire fund management industry.

The provision of segregating assets in actual default and not on a credit event is understandable for unrated debt papers. This means, until now, the segregation of assets triggered when a bond’s credit rating went down. But, when bonds are not rated, a credit rating downgrade is out of question.

The fairness in valuation is the overriding principle in the schedule to SEBI Mutual Regulations, opined an ex SEBI DGM who worked in the mutual fund department.

“Various market events and credit events may create anomalies in various AMCs approach to valuations, but equal treatment to all investors needs to be demonstrated in valuing papers,” added the ex SEBI Officer.

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First Published on Nov 13, 2019 03:23 pm
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