SEBI to rejig debt MF norms soon

Ever since the crisis of Infrastructure Leasing & Financial Services (IL&FS), the debt mutual fund investors have been living under a dark cloud. The new reality requires to factor defaults, liquidity concerns and the loopholes within the investment norms and definitions. This calls for a modification of the debt mutual fund norms.

Currently, Securities and Exchange Board of India (SEBI) is taking feedback from the mutual fund industry and has formed a working group to look into the best practices to warrant robustness of management of liquidity risk in open-ended debt funds.

The working group comprises of representatives from the mutual fund industry, including current Association of Mutual Funds in India (AMFI) Chairman Nilesh Shah (MD & CEO, Kotak AMC), NS Venkatesh (AMFI CEO), Amit Tripathi (CIO-Fixed Income, Nippon India AMC), Anil Bamboli (Fund Manager - HDFC AMC), Maneesh Dangi (CIO – Debt, ABSL MF) and Mahendra Jajoo (CIO-Fixed Income, Mirae AMC). This working group would be chaired by Ananth Narayan, Associate Professor at SPJIMR and also a member of SEBI’s Mutual Fund Advisory Committee (MFAC). This working group is said to provide recommendations to SEBI. However, the timeline for the same has not been specified yet.

The first issue that the working group is likely to consider is, whether open-ended debt funds should be mandated to have a minimum of 10 per cent exposure in liquid assets such as cash, government bonds, treasury bills (T-Bills) and tri-party repo (TREPS). Presently, apart from liquid funds, no such limits are imposed for any category of debt funds. Though this might bring down the returns, it will surely enhance the safety factor.

Further, amid recent shutting down of the six schemes, managed by Franklin Templeton MF, SEBI’s working group would also consider, whether any restriction on redemption should be imposed, or not. This means that, beyond a certain specified limit, the fund managers would have the ability to limit or halt redemptions.

Currently, duration funds have no minimum requirement with respect to the credit quality of the underlying paper. On the other hand, credit funds have no requirement for the underlying duration. For instance, the short duration fund should not be allowed to invest in perpetual bonds or floating rate bonds that do not fit in the basic requirements of the fund in terms of Macaulay duration. Hence, if we look at a near term fund's offer document, it may read a Macaulay duration of 3 to 6 months, which implies access to liquidity but having a closer look may reveal bonds that will mature after 7 to 10 years. Many experts believe that the scope of this computation should be tightened and defined more clearly.

Provided the thumped sentiment of the retail investors, this is the right opportunity for the market regulator to stiffen the rules. Even though the industry is fiduciary, many asset management companies (AMC) have exploited the existing norms. Therefore, the time has come for a change.