India’s capital markets regulator on Monday tightened the norms for investment by debt-oriented mutual fund (MF) plans and introduced caps on how much they can invest in debt issued by an individual company, a business group or to any specific sector.
The limits will apply to new schemes and fresh investments in existing ones, the Securities and Exchange Board of India (Sebi) said. The revision in exposure limits will mitigate risks and offer investors diversification benefits.
Sebi has been reviewing norms for such investments since August, when JPMorgan Asset Management Co. was forced to restrict redemptions in two of its schemes due to a downgrade of bonds issued by Amtek Auto Ltd.
Following the review, Sebi reduced the single issuer limit (limit of investment in securities sold by a single company) from 15% to 10% of the net asset value, or NAV, of the scheme.
This investment limit can be extended to 12% of the scheme’s NAV with the approval of the trustee of the fund house, Sebi said in a statement following a board meeting on Monday.
The market watchdog also introduced group-level limits for debt schemes. Sebi said the ceiling on fixed income investments at the group level of the issuer companies will be fixed at 20% of the NAV, which is extendable to 25% after trustee approval.
An issuer company’s subsidiaries, fellow subsidiaries, its holding company and associates will together be considered a group, according to Sebi. All state-run entities, including public sector banks, will be excluded from the group level limits, Sebi added.
Additionally, Sebi has reduced the exposure limit for an MF scheme across a single sector to 25% of the fund’s NAV from 30% at present.
To curb the further credit risks MFs take in the housing and realty sector, Sebi reduced the additional exposure limit provided for housing finance companies in the finance sector from 10% of NAV to 5% of NAV.
The revision in exposure limits in corporate bonds will mitigate risks arising on account of high levels of exposure in the wake of events pertaining to credit downgrades, said Sebi, adding that this will help MFs handle adverse credit events better.
It will also provide mutual fund investors with enhanced diversification benefits, the regulator said, adding that “appropriate time” shall be given for asset management companies (AMCs) to ensure that their schemes comply with the new rules.
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