Sebi chairman warns fund managers over bad assets
Chairman of Securities and Exchange Board of India (Sebi) Ajay Tyagi on Thursday cautioned fund managers against adding bad assets in their portfolios while investing in fixed-income securities.
“….Another issue is that there have been instances of defaults in debt portfolios of mutual funds. Mutual funds need to strengthen their own due diligence and evaluation mechanism and not depend only on credit rating agencies. In terms of practice, one should be more careful. Care should be taken that NPAs (non-performing assets) do not get shifted to mutual fund portfolios by way of transfer of debt. Fund managers need to be watchful and responsive,” said Tyagi at a summit organised by mutual fund industry lobby Association of Mutual Funds in India (Amfi).
At present, there are 44 fund houses in the country, which managed average assets worth ₹19.47 lakh crore as on May 31.
Tyagi hinted a strong concern at Sebi over multiplicity of mutual fund schemes and asked the industry to lower the number of schemes by consolidating the ones that have similar investment objectives.
“There is more required to be done in terms of merger and consolidation of schemes. Forty-five fund houses are selling more than 2,000 schemes. We need to consolidate the number of schemes. More schemes lead to confusion amongst the investors. This needs to be further pursued by Amfi to the mutual funds that this merger of schemes happen so that it further simplifies things and increases credibility of mutual funds among investors,” said Tyagi.
Tyagi also urged fund houses to be careful while bringing in investors under new types of investment routes such as Real Estate Investment Trusts (Reits) and Infrastructure Investment Trusts (InvITs). “This really is a testing time for fund managers. We are concerned about individual investors. REITs and InvITs are new instruments. Fund managers should first educate themselves and then educate the investors about these new instruments and new avenues. Sebi has followed a guarded approach about investment in new instruments,” said Tyagi.
The market regulator is also concerned about low penetration of mutual funds in locations beyond top cities and utilisation of money for advertising mutual fund schemes.
“There is a good penetration, but beyond top 15 cities there is a lot to be done. Despite the size of the industry doubling in the last four years, only 16% of the assets under management is coming from beyond 15 cities. As on March 31, out of ₹175 crore, only ₹28 crore has been utilised by the industry for advertising and increasing mutual fund awareness. This money should be used effectively, especially beyond 15 cities, so that mutual fund awareness increases,” said Tyagi.
In January 2016, Sebi had tightened the norms for investment by debt-oriented mutual fund plans and introduced caps on how much they can invest in debt issued by an individual company, a business group or to any specific sector. Sebi, in January 2016, reduced the single issuer limit (the limit of investment in securities sold by a single company) from 15% to 10% of the net asset value, or NAV, of the scheme.
The market watchdog also imposed a ceiling on fixed-income investments at the group level of the issuer companies at 20% of the NAV, which can be extendable to 25% after trustee approval. Sebi had reduced the exposure limit for an MF scheme across a single sector to 25% of the fund’s NAV from 30% earlier.
Consequently, Sebi warned AMCs to avoid taking undue credit risks by investing in the debt of companies that are saddled with loans and could face potential rating downgrades.
Later in November, Sebi tightened the norms for credit rating agencies too and asked them to define on what basis they rate companies and how the rating process is carried out.
Sebi directed rating firms to disclose any change in the rating process or policies on its website along with the original provision so that investors can understand the changes. Additionally, the raters were directed to disclose in advance the rationale for rating changes and the history of ratings for all instruments issued by the company so that investors are able to take an informed decision while dealing in any security associated with the same company or its group firms.