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Mutual Funds Can Now Invest In Unlisted NCDs

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Mutual Funds Can Now Invest In Unlisted NCDs
Ashfaque Ismail - 02 October 2019

Market regulator Securities and Exchange Board of India (Sebi) on Tuesday issued a notification clarifying that mutual funds can now invest in unlisted Non-Convertible Debentures (NCDs). The regulator issued “Review of investment norms for mutual funds for investment in Debt and Money Market Instruments” guidelines.

At present, according to Sebi, mutual fund scheme cannot not invest in unlisted debt instruments including commercial papers (CPs), other than (a) government securities, (b) other money market instruments and (c) derivative products such as Interest Rate Swaps (IRS), Interest Rate Futures (IRF), etc, which are used by mutual funds for hedging.

“However, mutual fund schemes may invest in unlisted Non-Convertible Debentures (NCDs) not exceeding 10 per cent of the debt portfolio of the scheme,” Sebi said in its notification.

Sebi further said the new guidelines are being introduced to enhance transparency and disclosure for investment in debt and money market instruments by mutual funds.

The market regulator further clarified that the new rules are subject to the condition that such unlisted NCDs have a simple structure (i.e. with fixed and uniform coupon, fixed maturity period, without any options, fully paid up upfront, without any credit enhancements or structured obligations) and are rated and secured with coupon payment frequency on monthly basis, the market regulator explained in the notification.

The implementation of the above provisions would be subject to the following:

a. Timelines and investment limits

Timeline (As on) 31/03/2020 30/06/2020

Maximum investment in unlisted NCDs as percentage of the debt portfolio of the scheme. 15 per cent 10 per cent

Source: Sebi

b. The existing investments of mutual fund schemes in unlisted debt instruments, including NCDs, maybe grandfathered till maturity date (as stands as on the date of this circular) of such instruments.

c. All fresh investments in unlisted NCDs shall be made only in NCDs satisfying the conditions mentioned above.

d. Extension of maturity or rolling over of existing investments in unlisted NCDs shall be subject to the prescribed limits and the requirements mentioned above.

e. For mutual fund schemes whose existing investments in unlisted NCDs are more than the threshold limit as on the timeline mentioned above, all fresh investments in NCDs by mutual fund schemes, shall only be in listed NCDs till they comply with the above mentioned requirements.

“All fresh investments by mutual fund schemes in CPs would be made only in CPs which are listed orto be listed with effect from one month from the date of operationalization of framework for listing of CPs or January 01, 2020,whichever is later,” Sebi said.

Read full SEBI circular here:

Review of investment norms for mutual funds for investment in Debt and Money Market Instruments

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