SEBI lowers MF exposure limits

As part of its attempts to make mutual funds reduce their exposure to one issuer or a sector in the debt schemes, the capital markets regulator Securities and Exchange Board of India (SEBI) has lowered the exposure cap for such investments by mutual funds.

The SEBI Board has decided to amend the mutual fund regulations so that single issuer limit is reduced to 10 per cent of the net asset value (NAV) of the scheme, which can be increased to 12 per cent of the NAV but only after an approval from the trustees. The sector-specific exposure limit has also been reduced from the current 30 per cent of the NAV to 25 per cent.

According to a statement from SEBI, the new norms would mitigate risks arising on account of high levels of exposure in the wake of events pertaining to credit downgrades and put mutual funds in a better position to handle adverse credit events.

In August 2015, a sudden downgrade in the credit rating of Amtek Auto Ltd led to a fund house taking a massive hit on its NAV and freezing all kinds of redemption for a brief period of time.

Green bonds

The SEBI board has also approved the disclosure requirements for issuance of green bonds that are issued to raise funds for a ‘green’ project like climate change, renewable energy, sustainable water or waste management or clean transport, among others. The capital markets regulator has said that while the issuance and listing of green bonds will be governed under the SEBI (Issue and Listing of Debt Securities) Regulations, an issuer of such bonds will have to make incremental disclosures.

The requirement of an independent party reviewer for reviewing the pre-issuance and post issuance process including project evaluation and selection criteria has been kept optional and there will be no mandatory requirement of an escrow account as well.

However, issuers will have to make disclosures regarding the use of proceeds, list of projects to which the funds have been allocated in the annual report and periodical filings to the stock exchanges.

Exit opportunity

Among other things, the capital markets regulator has also laid down the guidelines for providing exit opportunity to all the dissenting shareholders of a company.

According to the Companies Act 2013, a company that raised money from the public and still has an unutilised portion of those funds cannot use it for any purpose other than what is stated in the prospectus unless a special resolution is passed. The Act also states that dissenting shareholders should be given an exit option.

New norms will mitigate risks arising on account of high levels of exposure

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