𝐒𝐄𝐁𝐈 𝐂𝐢𝐫𝐜𝐮𝐥𝐚𝐫: 𝐌𝐚𝐫𝐤-𝐭𝐨-𝐌𝐚𝐫𝐤𝐞𝐭 𝐕𝐚𝐥𝐮𝐚𝐭𝐢𝐨𝐧 𝐟𝐨𝐫 𝐒𝐡𝐨𝐫𝐭-𝐓𝐞𝐫𝐦 𝐑𝐞𝐩𝐨 𝐓𝐫𝐚𝐧𝐬𝐚𝐜𝐭𝐢𝐨𝐧𝐬 𝐢𝐧 𝐌𝐮𝐭𝐮𝐚𝐥 𝐅𝐮𝐧𝐝𝐬

SEBI has issued a draft of circular inviting public feedback on the proposed valuation methodology for mutual fund investments in repurchase (repo) transactions with a tenor of up to 30 days. This initiative seeks to establish consistency across all money market and debt instruments through a standardized mark-to-market (MTM) approach.

𝐁𝐚𝐜𝐤𝐠𝐫𝐨𝐮𝐧𝐝:

(a) According to the existing provisions of Regulations 25(19) and 47, in conjunction with the Eighth Schedule of SEBI (Mutual Funds) Regulations, 1996, the norms for valuing investments made by Mutual Fund schemes are outlined in paragraph 9.6 of SEBI’s Master Circular on Mutual Funds, issued on June 27, 2024 (“Master Circular”) which provides for the valuation of all investments by Mutual Funds in money market and debt securities to be carried out on a mark-to-market basis. However, these did not include securities which include repurchase transactions with tenor of upto 30 days.

(b) Chapter 9 of the SEBI Master Circular, which specifies the provisions for valuation of investment in securities by Mutual Funds, inter alia mandate that money market and debt securities with residual maturity over 30 days shall be valued as per the prices obtained from the Association of Mutual Funds in India (AMFI) empanelled valuation agencies and the methodology specified therein.

(c) Repurchase (repo) transactions, including tri-party repo (TREPS) with a tenor of up to 30 days, are allowed to be valued using a cost-plus-accrual method, also known as amortization-based valuation.

𝐏𝐫𝐨𝐩𝐨𝐬𝐞𝐝 𝐂𝐡𝐚𝐧𝐠𝐞

SEBI has proposed that mutual fund investments in repo transactions with tenors of up to 30 days adopt a mark-to-market (MTM) valuation approach. This adjustment is intended to address scenarios where issuer-specific events or adverse news might be more rapidly reflected in the MTM valuation of individual securities than in repo transactions, potentially creating unintended regulatory arbitrage. Applying MTM valuation to repo transactions of up to 30 days would thus harmonize valuation practices with those applied to other money market and debt instruments held by mutual funds.

The Draft Circular is open for feedback until November 14, 2024. Readers are encouraged to provide their comments and suggestions to Regstreet Law Advisors at info@regstreetlaw.com.

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