Securities and Exchange Board of India
CIRCULAR
DEPUTY GENERAL MANAGER
INVESTMENT MANAGEMENT DEPARTMENT
SEBI/IMD/CIR No. 9/141601/08
October 18, 2008
To,
All Mutual Funds Registered with SEBI
Association of Mutual Funds in India (AMFI)
Sir/ Madam,
Sub: Valuation of Debt securities by Mutual Funds
This is in partial modification of SEBI Circular No. MFD/CIR/8/92/2000 dated September 18, 2000 and MFD/CIR No. 14/442/2002 dated February 20, 2002, which, inter-alia, specified the discount adjustments for debt securities rated by external agencies for ill-liquidity risk, promoter background, finance company risk and issuer class risk.
It has been brought to notice of SEBI by AMFI and CRISIL that the current valuation methodology which allows the discretion of -50 basis points (bps) to +100 bps to account for the aforesaid risks is inadequate as debt securities of similar maturity and credit rating are being traded over wide range of yields. With a view to ensure that the value of debt securities reflects the current market scenario in calculation of net asset value, it has been decided to increase the discretion permitted.
Accordingly, the clauses C(I) and C(II) of the circular dated September 18, 2000 and clause 4 of the circular dated February 20, 2002 shall be revised as follows:
| Category | Current | Proposed | ||
| + | – | + | – | |
| Rated instruments with duration upto 2 years | 100 bps | 50 bps | 500 bps | 150 bps |
| Rated instruments with duration over 2 years | 75 bps | 25 bps | 400 bps | 100 bps |
In case of unrated debt securities:
| Category | Current | Proposed |
| Unrated instruments with duration upto 2 years | Discretionary discount of upto +50 bps over and above mandatory discount of +50 bps | Discretionary discount of upto +450 bps over and above mandatory discount of +50 bps |
| Unrated instruments with duration over 2 years | Discretionary discount of upto +50 bps over and above mandatory discount of +25 bps |
Discretionary discount of upto+375 bps over and above mandatory discount of +25 bps |
Other contents of the aforesaid circulars remain the same. hese guidelines shall come into effect immediately.
This circular is issued in exercise of powers conferred under Section 11 (1) of the Securities and Exchange Board of India Act, 1992, read with the provisions of Regulation 77 of SEBI (Mutual Funds) Regulations, 1996, to protect the interests of investors in securities and to promote the development of, and to regulate the securities market.
This circular is available on SEBI website at www.sebi.gov.in, under the category “Mutual Funds – Circulars”.
Yours faithfully
Ruchi Chojer
