SEBI has said that of the two valuation agencies in charge of valuing securities, fund houses must take into account the more conservative valuation of such stressed companies.
The Securities Exchange Board of India (SEBI) has allowed the valuation agencies to use discretion while valuing securities held by mutual funds in case the company that has issued the security goes through a debt restructuring.
As per SEBI valuation norms for debt funds, if a company defaults on interests or principal, then the valuation agencies revalue the security (this results in a fall in its credit rating) and all debt funds holding their portfolios must revalue accordingly. In simple words, a fall in credit rating leads to a fall in the scheme’s net asset value. However, if the rating falls to below investment grade (a ‘BBB-‘ rating), then mutual funds follow the valuation matrix provided by AMFI and applies a more stringent haircut. The security’s value- and thereby the scheme’s NAV- falls.
SEBI has now relaxed its rules and allowed valuation agencies to be lenient if the company has been facing stress due to COVID-19. The market regulator has also added that valuation agencies must also, at the same time, factor the company’s change in terms of investment, it’s financial stress and capability to repay the dues or borrowings on the extended dates. In April 2020, SEBI had relaxed the valuation norms till the period of moratorium permitted by the Reserve Bank of India. SEBI has also provided relaxation to credit rating agencies in recognition of default for restructuring by the lender or investors solely due to COVID-19-related stress. Today’s announcement is an extension of all steps taken earlier.