MUMBAI (TIP): Call it the Amtek Auto effect. After investors in debt schemes suffered losses last year, mutual funds are under close watch over credit-rating downgrades as with that of Jindal Steel & Power (JSPL).
The Securities & Exchange Board of India (Sebi) is examining whether funds may be dressing up portfolios to shield low-rated debt securities, a senior official said. It’s looking to see if mutual funds transferred instruments, such as those of JSPL, from one scheme to another.
Such inter-scheme transfers take place when there is a shortterm requirement for liquidity or when an instrument is illiquid.
Bond markets are relatively illiquid, especially for instruments with low ratings, prompting fund houses to resort to the arrangement. The regulator has previously not been too pleased with mutual funds that have shifted securities at valuations not considered fair.
With various industries under stress, the capital market regulator has stepped up vigil on the health of debt schemes.
“We have sought information about inter-scheme transfers, whether purchases were made from the secondary market, etc,” said the Sebi official, who didn’t want to be named. “If there is anything alarming, we will take a close look at it.” He clarified that there was nothing that could yet be described as alarming about the JSPL downgrade.
Mutual fund executives said Sebi officials have of late been asking fund houses specifically about their exposure to JSPL’s debt securities. The enquiries have been made over phone rather than by email, they said.
Net asset values (NAVs) of some Franklin Templeton and ICICI Prudential Asset Management debt schemes that held JSPL securities fell 1-3% in a day earlier this week, triggering the credit rating downgrade by Crisil.
In 2015, investors in two debt schemes of JPMorgan Asset Management had borne the brunt of downgrades of troubled auto component maker Amtek Auto’s debt instruments.
This followed a delay in repayment of debt to JPMorgan, which imposed restrictions on withdrawals by investors. After a wait, unit-holders got back only 85% of the value of the segregated schemes that held the Amtek bonds.
This episode prompted Sebi to tighten rules on the exposure of mutual funds to debt, including limits on bond scheme investments in industrial groups. The new rules were aimed at getting mutual funds to diversify portfolios and lower potential risks.
The regulator has also been keeping tabs on mutual funds’ debt portfolios in the past few months, said the Sebi official cited above. “We have been seeking details from fund houses about their exposure to downgraded papers,” the official said.