- Liquid funds have to invest at least 20% in cash, government securities, t-bills
- Cap on sectoral limits has been reduced to 20% (from 25%). Exposure to HFCs limited to 10% (below from 15% previously)
- Graded exit load to be levied on liquid mutual funds for exit upto 7 days.
In light of a few credit events in the fixed income market that led to increase in liquidity risk of Mutual Funds, SEBI on Thursday, 27th June 2019, reviewed the regulatory framework and took necessary steps to safeguard the interest of investors and maintain the orderliness and robustness of Mutual Funds.
The Board has approved the following proposals:
1. Liquid Schemes shall be mandated to hold at least 20% in liquid assets such as Cash, Government Securities, T-bills, and Repo on Government Securities.
2. The cap on the sectoral limit of 25% shall be reduced to 20%. The additional exposure of 15% to HFCs shall be restructured to 10% in HFCs and 5% exposure in securitized debt based on retail housing loan and affordable housing loan portfolios.
3. A graded exit load shall be levied on investors of liquid schemes who exit the scheme up to a period of 7 days.
4. The valuation of debt and money market instruments based on amortization shall be dispensed with completely and shall be based on mark to market.
5. Liquid and overnight schemes shall not be permitted to invest in Short Term Deposits, debt and money market instruments having structured obligations or credit enhancements.
6. Mutual Fund schemes shall be mandated to invest only in listed NCDs and the same would be implemented in a phased manner. All fresh investments in Commercial Papers (CPs) shall be made only in listed CPs pursuant to the issuance of guidelines by SEBI in this regard.
7. All fresh investments in equity shares by Mutual Fund schemes shall only be made in listed or to be listed equity shares.
8. Prudential limits on total investment by a Mutual Fund scheme in debt and money market instruments having credit enhancements and on investment by Mutual Fund scheme in such debt securities of a particular group, as a percentage of the debt portfolio of the respective scheme have been prescribed at 10% and 5% respectively.
9. There should be adequate security cover of at least 4 times for investment by Mutual Fund schemes in debt securities having credit enhancements backed by equities directly or indirectly.
Valuation of Money Market and Debt Securities by Mutual Funds
1. In order to make existing provisions on the valuation of money market and debt securities more reflective of best practices, various proposals for amending the extant provisions were approved.
2. Further, in order to bring uniformity and consistency in valuation, various proposals on the waterfall approach for valuation of non-traded money market and debt securities by Mutual Funds were approved, along with acknowledging that valuation agencies may need a certain degree of flexibility in order to ensure fair pricing of securities. Nevertheless, in terms of the Principles of Fair Valuation, AMCs are responsible for ensuring fairness of valuation and they may deviate from the valuation guidelines, subject to appropriate documentation and disclosure.
3. In order to increase the robustness of valuation and address possible misuse, various proposals related to the valuation of Inter-scheme Transfers (ISTs), disallowing the use of own trades for valuation, etc., were approved.
Suitable grandfathering wherever applicable and adequate time period shall be provided for implementation of the above proposals.