In the midst of a tumultuous week when most of the action was focused on Kashmir, the monetary policy and the global macro risks; SEBI tightened the screws on mutual funds a little further. In its last board meeting, SEBI had come out with a series of norms for MFs to become more transparent in their practices. This week, SEBI has gone a step further and rightly so.
Only listed securities please
In a clear moved aimed at discouraging mutual funds from investing in opaque companies, the regulator has now insisted that mutual funds can only invest in listed equity and debt. So, any investment in unlisted company equity or in debt that is in the form of private debt is not permitted any longer. The reasons for this move are not far to seek. In the last 6 months, a few large mutual funds had to freeze redemptions on their fixed maturity plans (FMPs) due to investments in illiquid paper where the issuer was on the verge of default. The advantage of focusing on listed paper is that all such listed debt paper has to be automatically rated by a rating agency. Also, the listing agreement compels these companies to adhere to more stringent standards of disclosure and transparency. Deals like Zee, where promoters struck private deals with fund managers, will not be permitted any longer. This will be a great move to protect the interests of the investors. After all that is the focus of SEBI!
Reduce unrated debt
The listed securities announcement will be applicable only to prospective assets acquired. But what about assets that is already in the portfolios of mutual funds. Here the regulator has offered an option for phased reduction. All debt funds holding such unrated paper in their portfolios will have to reduce their exposure to unrated paper from the current 25% to 5% in a phased manner. That means a lot of such privately agreed debt will have to be wound up and we may see more such redemption problems come to light. While that could create short term pain in the market, SEBI is of the view that it would clean up the system once and for all.
SEBI is bang on target
The reason SEBI is moving on such a war footing is that if the debt fund problem was allowed to fester, it could again lead to loss of investor confidence. Fund managers comparing of some FMPs talking like high-handed village chieftains has hardly helped build investors confidence. In most cases, SEBI has realized that the trustees to the fund were not in a position to enforce such discipline on the fund managers. While such regulation may appear to be tough on the funds, it is the right step from the perspective of investors. At Rs.25 trillion, Indian MFs are too big to be left to their own whims and fancies to manage money! ©
