Sebi puts safety net around liquid, debt fund investors

Sebi puts safety net around liquid, debt fund investors

Mumbai, Jun 28: Markets regulator Sebi said that every liquid fund should put at least 20% of its total corpus in highly liquid and zero-risk debt market instruments like government bonds and treasury bills, which could lower risks for investors in these schemes.
Sebi in its board meeting earlier in the day also decided that debt and liquid funds will not be allowed to invest more than 20% of their corpus in debt instruments from any particular sector and not more than 10% in housing finance companies. It also put in place stricter norms for promoters of listed companies to pledge their shares and enhanced disclosure standards for such pledges.
The markets regulator also said that companies can pay up to 5% of their annual sales as royalty to entities like promoters and associated entities and such payments will not be qualified as related-party transaction. Earlier this was capped at 2%.
Sebi’s decision related to liquidity buffer for liquid funds is aimed at ensuring that such funds have easily encashable assets to fall back on in case of a sudden spike in redemptions. This is aimed at ring-fencing retail and small investors from incurring sudden and huge losses during volatile bond market situations, like the one witnessed a few weeks ago when Essel Group companies delayed payment on its NCDs, and DHFL defaulted.
On June 3, it was reported that Sebi was contemplating such a move, which is similar to statutory liquidity ratio (SLR) for banks and liquidity coverage ratio (LCR) for NBFCs. Currently, across 40 fund houses, an annual average of Rs 4.5 lakh crore is invested in liquid funds.
During interaction with the media, Sebi chairman Ajay Tyagi said there was no systemic risk in the debt market. He agreed the decision to maintain liquidity buffer may reduce returns for investors slightly, but said the steps will make the market safer. Tyagi also said that a graded exit-load will be levied on liquid scheme investors if they exit within seven days.
Sebi also barred liquid and overnight schemes from investing in short-term deposits, debt and money market instruments having structured obligations or credit enhancements facilities. Sebi has also banned fund houses from entering into standstill agreements with promoters of companies. These pacts are between fund houses and promoters under which promoters assure to bring in funds to meet their payment obligations at a higher interest rate and more collateral, while fund managers assure not to go for a fire sale of pledged shares that are already kept as collateral.
In February, two fund houses — HDFC MF and Kotak MF — had signed standstill agreements with Essel Group promoters. Subsequently, Sebi issued show-cause notices against those fund houses.In its board meeting, Sebi also tightened disclosure norms for pledging by promoters and said that even indirect lien of shares will qualify as encumbered shares.