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MFs allowed to segregate bad assets

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As part of its measures to minimise an industry-wide impact of a debt default, the Securities and Exchange Board of India (SEBI) has allowed mutual fund (MF) houses to segregate bad assets — known as side pocketing in industry parlance – in their debt and money market schemes.

The capital markets regulator would also soon prescribe guidelines for uniformity in pricing of corporate bonds and evolve a regulatory framework for such pricing by agencies like CRISIL and ICRA.

These were among the decisions approved by the board of the capital markets regulator, which met here on Wednesday.

“Creation of segregated portfolio is a mechanism to separate distressed, illiquid assets from other more liquid assets in a mutual fund portfolio to deal with a situation arising due to a credit event,” SEBI said in a statement.

“With a segregated portfolio, investors who may take the hit when the credit event happens shall get the upside of future recovery, if any,” it added.

Addressing the media, SEBI chairman Ajay Tyagi said that the regulator would soon issue the regulatory framework for such segregation and include safeguards so that it did not in any way lead to fund managers misusing the facility and taking undue risk.

IL&FS the trigger

Interestingly, SEBI’s decisions are largely triggered by the developments at IL&FS, which has defaulted on its various repayment obligations, leading to a liquidity crisis across segments like mutual funds and non-banking financial companies.

Sumit Agrawal, founder, RegStreet Law Advisors, and a former law officer at SEBI, is of the view that side pocketing will help fund managers ring-fence bad assets, thereby minimising the affect on the net asset value (NAV) and benefiting investors. Among other decisions, the regulator tweaked the framework for Institutional Trading Platform (ITP) and renamed it as Innovators Growth Platform (IGP) for companies in the fields of technology, bio-technology, nano-technology, intellectual property and data analytics.

The regulator has also expanded the universe of companies for whom the Offer For Sale (OFS) mechanism is available. Shareholders of any company with a market capitalisation of over ₹1,000 crore would be able to use the OFS mechanism instead of the current limit of the top 200 companies.

For the commodity derivatives market, the regulator has allowed custodial services that would enable institutional participation in the segment. In this regard, the regulator has approved the amendment of SEBI (Custodian of Securities) Regulations 1996.