SEBI Hints at Toughening Asset Valuation Provisions for Mutual Funds

SEBI (Securities and Exchange Board of India), on Tuesday, indicated that the market regulator might toughen the prevailing asset allocation norms for mutual funds. The norms could be reevaluated and tightened to govern mutual funds investments in the country.

SEBI Chairman Ajay Tyagi said that existing norms had been reviewed to ensure consistency and uniformity in the approach, improve continuity and look into loopholes and malpractices with the norms.

With over 800 million existing investor portfolios, the Assets Under Management (AUM) of mutual funds stands at Rs.24.5 trillion in India. Tyagi added that SEBI plans on taking measures on issues relating to the approach and flexibility for valuation of debt securities.

The changes are expected to ensure fair pricing of debt securities with the Asset Management Companies (AMCs) under SEBI’s radar. The regulator also pointed out to credit defaults during the last year, which had a diverse impact on mutual funds and the financial sector.

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Despite the average net redemption in liquid schemes being around 19%, a recent study on liquid schemes by SEBI revealed that in over 20% of the credit defaults, the average holding was found to be less than 5% of the AUM.

The series of events over the last year forced SEBI to review not only the risk management norms on debt funds but also the framework of money market instruments.

SEBI has reportedly lowered the minimal holding by liquid schemes in liquid instruments to 20% in a move to address the issue. In the same line, the norms for graded exit load in such schemes were also laid out. Restrictions were also put in place for investments in unlisted equities, debt instruments, commercial papers and non-convertible debentures.