Slowly and steadily India is moving towards a transparent and efficient economic system through good corporate governance. While we witnessed changes in the Income-tax provisions and the revamped GST Portal for the ease of doing business, the capital market regulator of the country has also announced a revision in the disclosure requirements for transactions in money and debt securities.

Further, The Securities and Exchange Board of India (Sebi) has also permitted mutual funds houses to create segregated portfolios for an unrated debt or money market instruments of an issuer not possessing an outstanding market instrument. Such separation of unrated instruments (money or debt instruments) may be formed in case of actual default committed either in the payment of interest or principal amount.

Mutual fund written on translucent blue space

With a view to further enhance transparency and disclosure requirements, SEBI has revised disclosure compliances pertaining to debt and money market securities transactions for mutual funds. The concerned requirements will come into effect from October 1, as per the announcement made by the Securities and Exchange Board of India (SEBI).

What information will be required to be disclosed under the new framework?

As per the new framework, mutual fund houses will be required to mention the following details related to a security transaction-

1. Name of the security,

2. Type of security,

3.  Most conservative rating of security at the time of the transaction, if applicable,

4.  Name of the rating agency and transaction type.

Further, the market regulator has laid an obligation on mutual funds to disclose the particulars related to debt and money market securities concluded in their schemes portfolio, including inter-scheme transfers, on a daily basis within a time period of 15 days in a prescribed format rather than 30 days which are allowed in present.

Amongst others, the mutual fund houses will need to provide that information related to –

  • Status of the security(listed or unlisted);
  • Name of a mutual fund,
  • Name and details of the MF scheme;
  • Remaining days to attain final maturity,
  • Deemed maturity date,
  • No. of instruments traded ;
  • Face value per unit  of security ;
  • Value of such trade.

As per the provisions of the circular “actual default’ committed by the issuer of such instruments shall be the primary reason for the creation of a segregated portfolio. On the happening of which, the concerned AMCs will be required to inform AMFI reporting the actual default committed by the issuer, which may later on being satisfied with default segregate the portfolio of debt or money market instruments of the issuer concerned.

Generally, the portfolio segregation is done to separate distressed assets from other more liquid assets in a portfolio. In the wake of the pandemic, the watchdog said the trigger date for segregation of portfolio would be the date on which proposal for debt restructuring is received by the asset management company (AMC).

A Segregated portfolio could be formed in a mutual fund scheme by an Asset Management Company (AMC) in case of a credit event, which includes relegation to below investment grade and following delegates in credit rating by a Sebi-registered credit rating agency, as per one of the circular issued by SEBI in December 2018.

Further, on August 31, the Securities and Exchange Board of India announced through a circular that where the credit rating agency is of the opinion that restructuring by the lenders/ investors is primarily due to the reason of the related stress created by the global pandemic or under the RBI framework, then the credit rating agency will not be required to reflect it as a default agent.

Against the backdrop of the pandemic, Sebi has supplied the circular in order to partly alter the rules related to the segregation of portfolios.

Thus, the proposal related to the restructuring of debt received by AMCs to be immediately reported to the valuation agencies, credit rating agencies, debenture trustees, and AMFI (Association of Mutual Funds in India) and accordingly, such information should be immediately disseminated with the members.

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