Mutual Funds, borrowers can’t have stanstillpact, says SEBI
On Thursday in Mumbai the chairman of the Securities and Exchange Board of India (SEBI), Ajay Tyagi said that India’s asset management companies (AMCs) cannot resort to any kind of standstill agreement with borrowers.
Tyagi also said on the sidelines of an annual capital market summit organized by industry body, the Federation of Indian Chambers of Commerce and Industry (Ficci) that there cannot be any standstill agreement between mutual funds and their borrowers and all entries need to follow the mutual fund regulations.
A standstill agreement is a comprehension between a moneylender and a borrower, wherein the lender quits requesting scheduled payments of interest or principal on a loan with the goal that the borrower gets time to rebuild its liabilities.
On Wednesday, Subhash Chandra’s Essel Group-owned Zee Entertainment Enterprises Ltd (ZEEL) said its lenders, including mutual funds, had expanded the loan repayment deadlines.
ZEEL NCDs had bought by Fund managers of fixed income schemes, such as fixed maturity plans(FMPs). Mutual Funds have loaned around Rs 4,000 crores to ZEEL through non-convertible debentures (NCDs).
While open-ended mutual fund schemes typically have a flexible redemption deadline, closed-end schemes have strict fund closure deadlines linked to the maturity dates of the NCDs or other debt papers, in which the scheme has invested in. When an AMC agrees to a standstill agreement primarily to facilitate a borrower who is unable to service debt on the due date it essentially short-changes investors by disregarding the committed FMP maturity date.
Because of the potential defaults by several firms in which mutual funds have invested, AMCs have been facing the rising risk of exposure, which eventually led to rating downgrades. And mutual funds should not rely completely upon the credit rating agencies (CRAs) and should have their way of assessing risks, said Tyagi.
For the valuation of money market and debt securities in their portfolios, the mutual fund should adopt a waterfall approach in a circular said by the Securities and Exchange Board of India(SEBI) on Thursday. SEBI also added AMCs (Annual Maintenance Contract) must ensure all traded securities are valued based on traded yields, subject to identification of outlier trades by the valuation agencies.
Sebi altered the definition of “below-investment-grade” and “default” in mutual fund norms, stating that a money market or debt security shall be classified as “below investment grade” if the long-term rating of the security is below BBB- or if the short-term rating of the security is below A3.
A currency market or debt security will be delegated “default” if the interest, as well as chief sum, has not been gotten, on the day such sum was expected, or when such security was minimized to “default” grade by a CRA.
Sebi referenced that any augmentation in the development of a currency market or debt security will bring about the security being treated as “default”. On the off chance that a security is in default past its development date, the AMC must unveil the details and the estimation of the security and the aggregate sum due including principal and interest.
It said the exposure will proceed until the estimation of the security perceived in the net asset value is gotten, or for a time of three years from the date of development of the security. SEBI said all debt securities with lingering development of more than 30 days must be esteemed at the normal of security level costs acquired from valuation organizations to be named by the Association of Mutual Funds of India.
On 27 June, Sebi had opposed standstill agreements and said it will start acting against Mutual Funds if there were defaults in bodies of evidence including loans against offers to company promoters.