The market regulator, Securities and Exchange Board of India (SEBI), has reportedly come to a decision where mutual funds will be permitted to create a side-pocket or segregated portfolio of unrated debt securities.
The circular issued by SEBI said that the creation of a segregated portfolio of unrated debt instruments would be permitted only post the actual default of the principal or interest amount.
SEBI released a similar circular in December 2018 where the market regulator allowed the creation of a side-pocket or segregated portfolio of such debt instruments such to certain conditions including the credit event at the issuer level.
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Market experts believe that the new circular will ensure more transparency since the previous circular had not made any announcement concerning unrated debt instrument investments.
SEBI added that the Association of Mutual Funds in India (AMFI) would be informed about the actual default by the issuer, by the Asset Management Companies (AMCs). Once AMFI is informed about the actual default, the rest of the AMCs shall be immediately informed the same.
Side-pocketing is an investment strategy where investors are allowed to redeem their other investments when rest is locked in debt mutual fund schemes until the mutual fund regains lost ground from stressed assets.
For any clarifications/feedback on the topic, please contact the writer at viswanathan.v@cleartax.in
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