SEBI to Cap Mutual Fund Investments in Debt with Special Features

The Securities and Exchange Board of India (Sebi) has put a limit on mutual fund investment in debt with special features, including Additional Tier 1 (AT1) bonds. The regulator said that no mutual funds under all its schemes should own more than 10 percent of AT1 bonds issued by a single issuer. Investment in a single issuer of such debt cannot exceed 5 percent of assets, SEBI said.

Moreover, funds with such investments or even enabling provisions for such investments should enable side pocketing in their schemes, the regulator said. However existing investments above the limits will be grandfathered – allowed to continue — and the limit will only apply to fresh investments. The circular will come into effect from April 1.

Several mutual funds were hit recently over their investments in Yes Bank’s AT1 bonds, which were written down before equity following the Reserve Bank of India’s rescue plan for the bank. Nearly Rs 37,000 crore was invested by MFs in perpetual bonds.

The restrictions will apply to all debt instruments that have special features like subordination to equity and convertible to equity upon trigger of a pre-specified event for loss absorption. Currently, there are no specified investment limits on such instruments, which are considered to be riskier than other debt instruments.

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