SEBI tweak norms to give space for debt MFs to breathe

On Wednesday, Securities & Exchange Board of India (SEBI) tweaked its norms to allow mutual funds to side pocket debt in case borrowers approach the asset management companies (AMC) for debt restructuring.

Previously, only debt securities that were downgraded below BBB- rating (investment grade) or defaulted debt that was restructured were allowed to be segregated. However, the latest circular from SEBI, which is said to be in effect from December 31, 2020, will allow even higher-rated debts to be side pocketed. For side pocketing, the date on which such a restructuring proposal is received by AMC is to be considered as the trigger date.

For those who don’t know, side pocketing is nothing but segregation of units when the debt turns bad or moves its credit rating below the investment grade. This reduces the impact on the overall portfolio and also helps the investors to exit from the unsegregated units. Further, in case of recovery, such bad debts would benefit the investor and not the speculator.

According to experts, even with the latest norms, the net asset value (NAV) of the debt funds can very well fall but the impact would remain minimal. Say, for instance, if an AA-rated company comes up for restructuring, it will get re-priced. Having said that, its impact would be low when compared to a lower-rated company that comes up with restructuring.

The partial tweak in norms was after Reserve Bank of India (RBI) allowed the lenders to offer resolution boulevards to borrowers on the back of COVID-19. Further, SEBI has directed MFs to instantaneously report any such restructuring proposals to credit rating agencies, valuation agencies, debenture trustees as well as to Association of Mutual Funds in India (AMFI).