Defaulted debt trade likely to benefit MFs

MUMBAI: The market regulator’s new framework, which facilitates trading in defaulted debt, is likely to create a distressed bond market in India, industry experts said, potentially helping asset management companies, among others, repay investors faster.

There is a market for stressed bank loans in India, where several large global distressed asset funds and asset reconstruction companies (ARCs) are active. But industry experts maintain that the move to allow trading of ‘D’ category debt papers and bonds will allow bond holders such as mutual funds to exit exposures faster. “This is an attempt to create liquidity for securities that at present would be rendered illiquid in case of a default. All in all, it seems that this new framework will give rise to a distressed bond market, where more experienced hands could come and buy these bonds. Sebi is trying to create new avenues to deal with emerging issues in debt, distressed assets and ensure that they do not face legal impediments,” said Ajay Shaw, partner, DSK Legal.

At present, exchanges suspend trading/reporting of trades on defaulted debt securities before the redemption or maturity date. Depositories impose restriction on off-market transfers that restricts tradability on and after the redemption date. This leaves little room for MFs to sell these bonds.

Swaraj Singh Dhanjal contributed to this story.