Sebi tightens norms for mutual funds

Coming down heavily on MF players who in recent past chose to use shareholder fund to buy out debt of bleeding invested companies, Sebi said MFs can't have standstill agreements with companies and will take action against fund houses for such deals.

Illustration: Dominic Xavier/Rediff.com

Following the liquidity crisis in some leading AMCs, regulator Sebi on Thursday made it mandatory for mutual funds selling liquid schemes to hold at least 20 per cent in liquid assets like cash, g-secs, and also banned them from entering into standstill agreements with firms into whose debt they have exposure to.

In a slew of reform measures, the regulator also capped the sectoral limit for liquid funds at 20 percent of the total assets.

It also tightened disclosure norms for share pledge by promoters, allowed tech companies with differential voting right shares to get listed on the main board.

The regulator also amended the listing obligations and disclosure norms regarding royalty payments and brand usage, apart from amending the insider trading regulations under which trading window closure shall be applicable from end of every quarter till 48 hrs after announcing financial results.

Coming down heavily on MF players who in recent past chose to use shareholder fund to buy out debt of bleeding invested companies, Sebi also said MFs can't have standstill agreements with companies and will take action against fund houses which had signed standstill pacts with companies.

After the board meeting, Sebi chairman Ajay Tyagi told reporters that the new risk management framework for liquid funds and prudential norms governing investment in debt and money market instruments by MFs are aimed at ensuring that risks to MF investors as well as shareholders of AMCs do not suffer because of the poor decisions of fund managers or promoters of debt issuing companies.

"Liquid schemes shall be mandated to hold at least 20 per cent in liquid assets such as cash, g-secs, T-bills and repo on gilts," Tyagi said, adding Sebi has also reduced sectoral cap to 20 per cent from 25 per cent earlier and also asked MFs to invest only in listed NCDs.

"All fresh investments in commercial papers will be made only in listed papers," the regulator said.

It also clamped additional exposure of 15 per cent to housing finance companies shall be restructured to 10 per cent and 5 per cent exposure in securitized debt based on retail housing loans and affordable housing loan portfolio.

"We have had wide consultations with the industry, Amfi, MFs...and the industry is fully on board as MF investment is different from bank lending. So, it is safety of the investment. One has to be prudentially careful," Tyagi said explaining the rationale for tighter norms.

Sebi also barred liquid and overnight schemes from investing in short-term deposits, debt and money market instruments having structured obligations or credit enhancements facilities.

"A graded exit-load will be levied on liquid scheme investors if they exit within seven days," Tyagi said.

Prudential limits on total investments by a mutual fund schemes in debt and money market instruments and having credit enhancements and on investment by MF schemes in such debt securities of a particular group, as percentage of debt portfolio of the scheme have been prescribed at 10 per cent and 5 per cent respectively, Tyagi said.

Sebi said there should be adequate security cover of at least four times the investment by MF schemes in debt securities having credit enhancements backed by equities directly or indirectly.

"Mutual funds have been a very good story with their AUMs almost doubling in the past four-five years.

“To restore the confidence, especially in debt schemes, these steps have been taken...hopefully with credit rating agencies tightening, confidence of investors, including retail investors will revive," Tyagi said justifying the measures.

He said Sebi has initiated adjudication against some credit rating agencies.

The Sebi has also tightened the share pledge disclosure norms, as it has taken a serious note of some fund houses' exposure to loan against share schemes, the markets regulator Sebi has tightened the norms for disclosing the details of pledged shares by promoters.

Loan against share schemes involve debt mutual funds investing in debt papers of little-known/lower-rated companies on the backing of promoter shares.

As per the new directions issued after a board meeting, Sebi said any direct, indirect lien on shares will qualify as encumbered shares.

"The promoters will have to furnish reasons if combined encumbrance crosses 20 percent of the company's equity capital," it said.

It can be noted that following the liquidity crisis among leading NBFCs, which began after the IL&FS group went belly up last September, shadow banks like DHFL, and media powerhouse Zee group among others had defaulted on their debt.

Both these companies however entered into standstill agreements with their lenders.

HDFC Asset Management Company had said it would buy back NCDs of DHFL worth Rs 500 crore which it could not redeem on time from its fixed income plan investors.

This meant that the shareholders of HDFC AMC would take a hit of Rs 500 crore.

However, Kotak AMC, which also could not redeem its units on time, had asked its fixed income plan investors to wait for another year for payments.

The regulator also gave an in-principal approval for changes in the method of calculation of net asset value, with a view to tackle the problem of concentration of asset under management with just 10 asset management companies and increasing the scope of the definition of encumbrance.

Sebi further said if the amount of pledged shares of a company is over 20 per cent, then its audit panels will have to be kept informed of any undisclosed encumbrance.

Sebi also issued a new framework for issuing differential voting right shares by tech companies, effective July 1, making the process easier for the promoters of such companies go in for initial public offers.

Tyagi said under the new framework a tech company having superior voting rights shares (SR shares) will be permitted to do an initial public offering of only ordinary shares to be listed on the main board.

Tyagi said the changes are necessitated by the need to enable issuance and listing of shares with differential voting rights since such shares have rights disproportionate to their economic ownership.

However, for listing the company has to ensure that the SR shareholder should be a part of the promoter group whose collective networth does not exceed Rs 500 crore and that the investment of SR shareholders in the shares of the issuer company shall not be considered and that SR shares have voting rights in a ratio of minimum 2:1 to maximum 10:1 compared to ordinary equity shares.

Post-listing, SR shares will be treated at par with the ordinary equity shares in every respect, including dividends, except in the case of voting on resolutions.

The total voting rights of SR shareholders (including ordinary shares), shall not exceed 74 per cent.

On the changes in the royalty payments, Sebi said payments made to related parties towards brand usage or royalty are to be considered material if the transaction exceeds 5 per cent of the annual consolidated turnover of the listed entity during a financial year and would require shareholder approval with no related-party having a vote to approve such resolutions.

The regulator also amended insider trading norms of 2015 under which trading window closure for listed companies shall be applicable from end of every quarter till 48 hours after declaration of financial results.

On its probe into the Whatsapp leak, Tyagi said investigation is in the final stage and action will be taken soon against the guilty.