SEBI enhances transparency in debt MFs

Securities and Exchange Board of India (SEBI) on Wednesday came out with a circular with norms that aims to enhance the transparency in debt schemes. In the last week's article, we had discussed that SEBI is likely to rejig norms for debt funds along with listing a few things that it might consider. To know more about it, click here:

Mutual funds now need to undertake at least 10 per cent of their total secondary market trades, excluding inter-scheme transfer (IST) trades by value in the corporate bonds on monthly basis and placing or seeking quotes via one-to-many mode on the request for quote (RFQ) platform of stock exchanges. Further, the percentage as specified shall be estimated based on the average secondary trades by value in immediately preceding three months on a rolling basis.

Say for instance, for the month of October 2020, the debt schemes need to undertake 10 per cent (by value) of their average secondary market trades (excluding IST) done in the month of July 2020, August 2020 and September 2020 as well as place or seek quotes for corporate bonds via RFQ platform of stock exchanges.

Further, mutual funds need to execute all transactions in corporate bonds and commercial papers via the RFQ platform of stock exchanges in a one-to-one mode wherein MFs are on both sides of the trade. If any transaction in corporate bonds by a mutual fund gets executed with another mutual fund in one-to-many mode must be accounted for in the aforementioned 10 per cent requirement.

With regards to portfolio disclosure, debt schemes now require to disclose their portfolio on a fortnightly basis within five days of every fortnight. Further, they must also disclose the yield of all the instruments in the portfolio.

These norms by SEBI are based on the recommendations provided by Mutual Fund Advisory Committee (MFAC) and will come into force with effect from October 01, 2020.

Indeed, this move of SEBI will further enhance the transparency in debt mutual funds. As debt funds now need to execute a minimum of 10 per cent trades by value in corporate bonds and commercial papers via exchanges, it would further increase the liquidity. The decision pertaining to portfolio disclosure and disclosure of yields on each instrument would further enhance the transparency. This move would enable the debt fund investors, who are stuck in schemes that took riskier bets by investing in low-rated papers.