SEBI to review risk management guidelines for mutual funds

The SEBI is looking to review the risk management guidelines which were set forth for mutual funds, due to the IL&FS episode. Rating agencies have downgraded IL&FS’s short-term and long-term debt facilities. ICRA downgraded long-term debt facilities from AA+ to BB and short-term debt facilities from A1+ to A4. It is to be noted that the SEBI’s new mutual fund categorization consider AA+ and above for long-term debt and A1+ for short-term debt as superior credit quality. This sharp downgrade by rating agencies was due to the weakening of company’s liquidity profile.

Last month, SEBI had asked the fund houses to share the details of exposure in the debt securities of IL&FS. As per the data as on August end 2018, mutual fund had over Rs. 2,400 crore worth of exposure in debt instruments of IL&FS and its subsidiaries. These investments are spread across different categories of debt mutual funds such as liquid funds, credit risk funds, FMPs (Fixed Maturity Plans), medium duration debt funds, short duration funds and hybrid funds.

SEBI first came out with the risk management guidelines for mutual funds on September 30, 2002 vide circular MFD/CIR/15/19133/2002. SEBI wants to ensure a minimum standard of due diligence across various areas like fund management, operations, customer service, marketing and distribution, business contingency, etc. for all the fund houses.

SEBI had asked fund houses to be cautious about managing debt mutual funds and advised fund houses to not completely rely on the credit rating agencies, rather do the credit assessment in-house.