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SEBI limited MF’s investment in Debt Instruments to 10% and Banned close-ended schemes investment in perpetual bonds

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Sebi issues framework for MF investments in debt instruments with special featuresOn March 10, 2021, The Securities and Exchange Board of India (SEBI) in its circular set a limit for Mutual Funds (MF’s) investment to 10% in debt instruments with special features such as additional tier-I (AT1) bonds.5% for single issuers and stated the maturity for perpetual bonds as 100 years.

  • The limits will be applicable only to new investments beginning 1 April all the existing debt instruments in excess of the limit will be grandfathered i.e (allowed to continue with the existing limitations)
  • The restrictions will apply to all debt instruments that have special features such as subordination-to-equity and convertible-to-equity upon the trigger of a pre-specified event for loss absorption.

Frameworks for Limiting MF’s investment:

i. No MF shall, under all its schemes, own more than 10 per cent of AT1 bonds issued by a single issuer.

ii.If investments of mutual fund schemes in such instruments in excess of the limits as on the date,
  • Then such mutual fund schemes will not make any fresh investment in such instruments until the investment comes below the specified limits.

iii.It has set a ban on close-ended schemes from investing in perpetual bonds such as AT1 bonds and modified their maturity to 100 years.

  • According to PRIME Database, nearly Rs 37,000 crore was invested by MFs in perpetual bonds, as of January.

iv.If such instrument is to be written off or converted to equity pursuant to any proposal, Sebi said the date of the proposal may be treated as the trigger date.

  • However, if such instruments are written off or converted to equity without any proposal, the date of write off or conversion of debt instrument to equity may be treated as the trigger date.

Note:

  • Perpetual bonds are fixed income securities with no maturity date. These bonds are not redeemable by the issuer, AT1 bonds come under this.
  • The segregated portfolio is a scheme to quarantine bad assets in a separate side portfolio allowing fair treatment to all unitholders and deal with liquidity risk.

Securities and Exchange Board of India (SEBI)

Powers of SEBI:

  • Quasi-Judicial:  SEBI has the authority to deliver judgments related to fraud and other unethical practices in terms of the securities market.
  • Quasi-Executive: Empowered to implement the regulations and judgments made and to take legal action against the violators.
  • Quasi-Legislative: SEBI reserves the right to frame rules and regulations to protect the interests of the investors.

Functions of SEBI:

  • By Securities Laws (Amendment) Act, 2014, it is able to regulate any money pooling scheme worth Rs. 100 cr or more.
  • Performs registration and regulation of the working of venture capital funds and collective investment schemes including mutual funds.

MFs and SEBI:

  • MFs are managed by Asset Management Companies (AMC), which are approved by SEBI to monitor the performance of the MFs and ensure that it works in compliance with SEBI Regulations.
  • For a separate AMC to offer mutual funds, the net worth of Rs 100 crore and shall maintain this net worth till it has profits for 5 consecutive years. (As per Amendment Regulations, 2021)
  • MFs dealing exclusively with money markets must register with the Reserve Bank of India (RBI) and all other mutual funds must register with SEBI.
  • Association of Mutual Funds of India (AMFI) – non-profit government organisation and regulator under SEBI as a self-regulation agency for MFs.

Recent related news:

On February 4, 2021, the Securities and Exchange Board of India (SEBI) has released new norms of Securities and Exchange Board of India (Mutual Funds) (Amendment) Regulations, 2021. This regulation came into force by amending, Securities and Exchange Board of India (Mutual Funds) Regulations, 1996.

About Securities and Exchange Board of India (SEBI)

Establishment – 1992
Headquarters – Mumbai, Maharashtra
Regional offices – Ahmedabad, Kolkata, Chennai, and Delhi
Chairman – Ajay Tyagi

About Mutual Funds(MFs)

It is a company that brings money together from many people and invests it in stocks, bonds, or other assets. The combined holdings of stocks, bonds, or other assets the fund owns are known as its portfolio.
Chairman of Association of Mutual Funds in India (AMFI) – Nilesh Shah