AMFI’s fiat on ‘haircut’ gives MFs new headache

AMCs advised to mark down value ahead of rating action

Mutual fund companies are finding themselves in a tight spot with the Association of Mutual Funds in India (AMFI), the nodal industry body, advising the asset management companies to be proactive in applying “the standard hair-cut matrix on sub-standard investment-grade debt securities without waiting for rating agencies to downgrade them.”

AMFI’s advice comes even as the asset management companies are struggling to adopt the ‘side-pocketing’ facility prescribed by SEBI for dealing with non-performing debt securities.

Last December, SEBI announced a set of norms that allow mutual funds to set aside bad debt with the approval of the Trustees and investors.

As per the new SEBI circular dated March 22 and AMFI’s best practices circular dated April 30, all mutual funds have to apply a standard haircut of 50 per cent for sub-investment-grade securities in the infrastructure sector with a current rating of D. The haircut will remain in force till the rating agencies compute the valuation of the sub-standard asset, it said.

NAVs take a beating

The net asset value of debt schemes of SBI MF, Reliance MF and UTI MF has fallen in the last few weeks indicating a mark- down in the value of their investments.

AMFI’s new best practices norms have put AMCs in a dilemma as they fear that applying the standard haircut matrix would lead to heavy redemptions, which can potentially bring down the net asset value of their fund drastically.

“With debt instruments failing and redemption pressure mounting, the industry may require a temporary bailout,” an industry expert told BusinessLine.

As per market estimates, about 1.3 lakh crore of NBFC debt (owed to the mutual fund industry) is coming up for repayment in the June quarter. Mutual funds have 3.2 lakh-crore exposure to NBFCs.

‘Time-consuming process’

MF players feel that ‘side-pocketing’ of bad assets is a time-consuming process even though SEBI’s mandate says that it should be done in 24 hours once the issuer of debt securities becomes a defaulter.

Experts say it requires amendment of the prospectus, passing of a resolution by the AMC Trustees and seeking the approval of the unit-holders.

“Side-pocketing may not be an effective remedy when the chips are down,” said a fund manager. Yet, SEBI is of the view that the AMCs should have prepared for such a contingency immediately after the circular on side-pocketing was issued in December last year.

[“source=thehindubusinessline”]

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