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Sebi directs mutual funds to share data on holdings in unlisted bonds

In order to meet redemption pressure, fund managers are struggling to either sell or pledge top-rated liquid papers to raise money

Market regulator Securities & Exchange Board of India (Sebi) has directed mutual funds (MFs) to disclose data of all holdings in unlisted bonds - securities which cannot be traded in a frozen bond market Market regulator Securities & Exchange Board of India (Sebi) has directed mutual funds (MFs) to disclose data of all holdings in unlisted bonds - securities which cannot be traded in a frozen bond market

Market regulator Securities & Exchange Board of India (Sebi) has directed mutual funds (MFs) to disclose data of all holdings in unlisted bonds - securities that cannot be traded in a frozen bond market. The move comes a week after one of the country's oldest asset management companies (AMC), Franklin Templeton Mutual Fund, voluntarily decided to close its six debt schemes effective from April 23, 2020. The AMC had cited redemption pressure and lack of liquidity in bond markets for the shutting of schemes.

In order to meet redemption pressure, fund managers are struggling to either sell or pledge top-rated liquid papers to raise money.

Sebi has asked the Association of Mutual Funds in India (AMFI) to furnish details - such as the assets under management of schemes holding unlisted non-convertible debentures (NCDs), unlisted bonds these have pumped in money and the share of such bonds in the scheme.

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The mutual fund body has also been asked to disclose investment break-up of portfolio of schemes holding unlisted NCDs, according to a report in The Economic Times. Funds have to give the details of residual maturities of all bonds (listed and unlisted) in each such scheme and whether an issuer holds other listed securities such as stocks, bonds, or CPs.

In 2019, Sebi asked MFs to reduce their investment limit in unlisted NCDs to 15% by March 31, 2020, and 10% by June 30, 2020.

However, considering a rise in bond yields, SEBI earlier this week eased the deadline by six months for MFs to comply with the cap on investments in unlisted NCDs. Unlisted NCDs have been facing a shortage of liquidity during the past few months as MFs were not allowed to invest in such securities (as well as unlisted commercial papers) since October 1, 2019.

The worth of unlisted papers in six schemes that were closed by Franklin Templeton was 32% as of April 22, 2020.

"Not all listed bonds are liquid, particularly in the current market. Probably SEBI is trying to assess the risk in the system and stress it could have if redemptions continue," said an industry person. "There are mid-sized companies, including NBFCs, which do not list their NCDs. In unlisted papers, the terms and conditions may not be readily available," said the person.

Sebi had asked  MFs to share details by Friday evening. "It's a bank holiday, exchanges are shut. We were not expecting any email from Sebi asking for data. The regulator has not said why it needs the information," a person with knowledge of the matter said.

Amid coronavirus crisis, funds are facing redemption pressure which is denoted by a rise in bond yields.

Many funds have sought a month-long loan line from banks - in place of the intra-day overdrafts they use in normal situations to meet the temporary cash-flow mismatch.

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On April 30, RBI decided to extend the regulatory benefits announced under the Standing Liquidity Facility-Mutual Fund (SLF-MF) scheme to all banks. To claim regulatory benefits, the banks would be required to submit a weekly statement on loans and advances extended to eligible entities.

The decision came merely three days after the RBI on April 27 announced a Rs 50,000 crore special liquidity facility to ease pressure on mutual funds, which are facing liquidity crisis amid heightened volatility in capital markets in reaction to COVID-19 outbreak.

This liquidity facility is available till May 11, 2020, or up to utilisation of the allocated amount, whichever is earlier. "When a scheme borrows, the interest cost to the extent of average portfolio yield is borne by the scheme. Most borrowings are at higher than portfolio yields and the spillover is borne by the AMC," a fund manager told ET.

MF schemes are allowed to borrow up to 20% of the assets under management.

By Aseem Thapliyal