SEBI CMD Ajay Tyagi (Reuters)
After three years at helm of the Securities and Exchange Board of India (SEBI), Ajay Tyagi will step down as its Chairman on March 1.
It would have been quite challenging for Tyagi with the non banking financial companies (NBFC) crisis surfacing in September 2018 one-and- a-half years after he took over the baton from UK Sinha.
In the aftermath of NBFC crisis that engulfed most mutual fund (MF) houses in the last one and half years, the markets regulator had to handle a double-edged sword.
SEBI came out with slew of circulars on changes making mutual funds more transparent, and at the same time, ensure that the interest of investors is protected.
Under Tyagi's leadership, the regulator cracked the whip on fund houses that had standstill agreements, issued guidelines on side pocketing, and on the valuation of debt securities, among others.
According to the industry bigwigs, the tenure of Tyagi as Chairman was beset with tumultuous events like the IL&FS Crisis, DHFL, Essel Group, the Karvy scam, etc, which in turn, triggered a quick set of responses from SEBI.
The resulting new regulations tightened the MF industry in terms of stricter valuations, tighter norms on the outgo commissions, and governance in funds handling. However, this has not crippled the fund industry.
“All are good moves by SEBI and such reforms sound bit alarming at first. But any kind of bottled-up risks could be harmful in future if left untreated,” said a CEO of a fund house.
In the last three years, equity assets grew from Rs 5 lakh crore in March 2017 to almost Rs 9 lakh crore by the end of January 2020, while debt assets doubled to Rs 6 lakh crore to over Rs 12 lakh crore levels during the same period.
In the last 3 years, the assets under management (AUM) of the industry grew from Rs 17 lakh crore in February 2017 to close to Rs 28 lakh crore, as of January end.
The numbers for AUM in February will be released next month.
Here is a rundown of important circulars issued under Tyagi's regime:Creation of segregated portfolios in MF schemes:
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, the practice involves fund houses isolating risky assets from the rest of their holdings, and capping the redemption of these segregated assets.
SEBI allowed MFs to create segregated portfolios for unrated debt or money market instruments of an issuer that does not have any outstanding rated debt or money market instruments. Such segregation of unrated debt or money market instruments may be created only in case of actual default of either the interest or principal amount.
SEBI’s measures were geared towards making debt funds more transparent in the way it values its underlying instruments such that the fund's net asset value (NAV) is separated from bad unpaid assets and thus stop value erosion.
SEBI brought this standardisation so that if a credit default happens, all affected funds would value their securities in a similar way through a cascading effect. This means a step-by-step approach to get the true value of the securities.Review of investment norms
SEBI reviewed investment norms for investment in debt and money market instruments. It allowed mutual funds to invest in unlisted non-convertible debentures (NCDs) up to a maximum of 10 percent of the debt portfolio of a scheme in a phased manner. From March 31, 2020, SEBI said that the maximum investment in unlisted NCDs will be 15 percent of the debt portfolio of the scheme and the investment limit will be 10 percent from June 2020.
Nearly one-and-a-half years after the Infrastructure Leasing & Financial Services (IL&FS) crisis broke out and took down debt funds in the credit problems that ensued, these guidelines promised to make your debt funds more transparent and a bit safer by sharpening the boundaries within which debt funds should value their securities.
Review of valuation norms
All debt securities up to 30 days remaining maturity prescribed are to be valued at an amortisation basis.
Earlier, the amortisation basis was allowed for debt securities up to 60 days maturity. However, following the debt default episodes for want of the reflection of true value, the remaining maturity period for amortisation methods was reduced by SEBI. This implied that all debt securities above 30 days of maturity were to be valued only at the mark to market.
This circular also prescribed the valuation of below investment grade securities only at the value provided by rating agencies, and if unavailable, at appropriate haircut value.
Starting April 2020, fund houses will all their securities at mark to market values, irrespective of their maturities.This will make the uniform valuation of each debt paper across the MF industry, thereby giving fair NAV to all.Total Return Index
From February 1, 2018, all mutual fund schemes were mandated by SEBI to use Total Return Index or TRI to benchmark their performance so that investors in equity shares gets returns from two sources: appreciation in traded price of share, and the dividends received. Fund houses welcomed this move and agreed to benchmark against TRI.
The mutual fund distribution community and the independent financial advisor (IFA) were unhappy because of the ban on upfront commission.
The ban on upfront commission dampened interests of those wishing to become IFAs.
In September 2018, SEBI banned upfront commissions paid to MF advisers, and directed fund houses to move to an all-trail model. After SEBI’s circular, trail commissions have dropped 20-25 basis points.
SEBI has further trimmed the annual total expense ratio (TER) that very large size MF schemes would charge to 2.25 percent. Earlier, TER was below 2.5 percent, but there was scope for market competition to determine adviser commissions.
With TER now reduced to critically low levels, the adviser community saw a decline in new entrants, leaving investors all alone to decide on MF schemes.Investment in derivatives
In May 2019, SEBI allowed mutual funds to participate in exchange-traded commodity derivatives (ETCD). Before this, mutual funds were permitted to participate in ETCDs through hybrid schemes, which include multi-asset scheme and gold ETFs.Categorisation of MF Schemes
In order to enable investors to make accurate comparisons of schemes, SEBI introducedthe categorisation and rationalisation of mutual fund schemes in October 2017. This was done to ensure that an investor is able to take a more holistic and informed decision while investing in a particular scheme.SEBI distinguishing advice from execution
In a board meet held on February 17, 2020, which was a last board meet under Tyagi’s regime, SEBI ruled that IFAs and wealth managers will not be allowed to use nomenclature like ‘independent financial advisers’ (IFAs) and ‘wealth managers’ without registering with SEBI as RIAs.