Sebi seeks more details from fund managers

In a cautionary note issued to fund houses, the Securities and Exchange Board of India (Sebi) also asked fund managers to closely monitor companies in their mutual fund portfolios that have been downgraded recently, two people familiar with the note sent out by the regulator said on condition of anonymity.

Sebi has asked funds for details that include the rationale for the purchase, and assessments of a credit downgrade risk. This activity from the capital market regulator, comes in the wake after there has been downgrades by rating agencies and their impact on debt funds. There was a sudden rush from investors to redeem their units, but fund house capped the redemptions at one percent of the total outstanding units. Amtek Auto has been in trouble since mid-June when it was reported that the company was facing a liquidity crunch and an inability to service its debt (about ₹17,600 crore as of March 2015).

As on August 31st, mutual fund industry has exposure of over Rs 4,500 crore into the papers of JSPL. Separately, Sebi is also looking at the ratings processes of agencies in the backdrop of recent downgrades of two large manufacturing companies, a Sebi official said. Wednesday’s meetings is a continuation of the regulator’s stance to protect investors, a source said.

Sebi has also asked mutual fund houses to report the downgrades in the bonds in which they invest to their trustees on a real-time basis and then to the regulator on a monthly basis and about their exposure to corporate bonds. However, there is no consensus on the issue as some funds want the affected fund houses to resolve the matter individually rather than presenting it as an industry-wide problem, sources said. At its meeting today, the mutual fund industry body would focus on putting in place a mechanism whereby mutual funds do not just depend on ratings to decide on their investments. Credit rating agencies take action on a particular entity after analysing financial situation for sometime and a fund house taking an investment call merely based on a rating move would be like being behind the curve.