Search the Internet           Tips

SEBI, MFs lock horns over new valuation norms, NPAs

NetScribes/Janaki Krishnan

The Securities and Exchange Board of India and the mutual funds are at loggerheads again. This time, the argument is over the new valuation norms and provisioning for non-performing assets.

While SEBI is prepared to defer the date for giving effect to the new guidelines, it is in no mood to make any other concession with regard to the norms themselves.

The original date set by SEBI in its September 18 notification was October 1, 2000. However, given the uproar created by the mutual funds, the securities watchdog has indicated its willingness to extend the date by another 20 days. But the mutual funds are not happy. They are insisting that the effective date should be December 1.

Ashok Kacker, executive director in charge of mutual funds at SEBI, confirmed that the date for effecting the new norms had been deferred for the time being. "But we have not fixed any new date and we certainly cannot extend the date up to December," he said.

The mutual funds, under the aegis of the Association of Mutual Funds of India, on Thursday made a representation to SEBI that they would be unable to adopt the new norms with effect from the date set by the regulator as they have yet to get their software and other systems in place.

"We would have liked them to be ready by October 1, but some of the funds told us that they would not be ready by that time. Since we want all the funds to implement it at the same time, we will defer the date," said Kacker, adding that a deadline would be announced on Monday next.

Kacker, however, ruled out any amendments to the norms, saying that they had been formulated after extensive discussions with industry players. Mutual funds are clamouring for a meeting early next year to have a review of the norms.

Some mutual funds are upset with the valuation formula for thinly-traded and non-traded equities. For thinly-traded equity securities, the net worth would be calculated on the basis of the share capital and reserves (excluding revaluation reserves) net of miscellaneous expenditure, divided by the number of outstanding shares.

For purposes of capitalisation, only 25 per cent of the industry average price to earnings ratio would be taken.

Where non-traded securities form more than 5 per cent of the total assets of the scheme, an independent valuator would be appointed to value the securities.

"This valuation is ridiculous in respect of shares that have been privately placed prior to an issue," said Santosh Kadam, vice-president (operations) at Birla Mutual Fund. Since such shares would not have any market data, they would have to be valued by an independent valuator.

Shekhar Sathe, chief executive officer of Kotak Mahindra Mutual Fund, said that the valuation norms would have an immediate impact on the net asset values of the various schemes in existence. "The extent and the nature of impact will depend on how the individual schemes have been treating the valuation process so far," he said, pointing out that in some cases, it might even go up.

Funds are worried about this aspect of the matter - of late, the market has not been kind to many schemes, the effect being a sharp erosion in NAVs. "At this point in time, we would rather not have norms which make us report lower NAVs," said a senior official in a leading mutual fund.

The funds want to put off the implementation to a later date, by which time they expect the market to have made a recovery, giving the funds sufficient time to put their portfolios and valuations in order.

However, all of them agreed that the norms were necessary as they created a standard set of valuation techniques which made it easier to benchmark schemes in various categories. "Now we can compare apples with apples," was how Sathe put it.

The provisioning norms for non-performing assets are expected to impact the older mutual funds. "But the impact will not be felt until the end of the year," said Sathe.

According to the new norms, provisioning for bad debts for bonds and debentures held by MFs would have to be done in phases extending not more than 18 months past the due date for the interest. An asset would be classified as NPA if the interest or the principal amount has not been received or has remained outstanding for one quarter from the day such income or installment has fallen due.

Since some of the older funds have accumulated NPAs amounting to more than 15 per cent of the market cap of their portfolios, the NAVs of such schemes are expected to be severely impacted.

Money

Business News

Tell us what you think of this feature