SEBI chief cautions on corporate debt investments
Other | Photo Credit: Reuters

Concerned over mutual fund investors' exposure to distressed corporate bonds, markets regulator Sebi today asked fund houses to be careful about such investments and said it has launched a wider scrutiny of the risks posed by such investment decisions.

Securities and Exchange Board of India chairman U K Sinha also said that Sebi may soon issue additional guidelines for credit rating agencies with respect to rating procedures on such corporate bonds.

The issue assumes significance in the wake of some mutual fund schemes facing huge losses due to sudden rating actions on certain distressed corporate bonds.

Sinha said Sebi "has begun the process" of looking into concentration risks, sector risks as well as company risks with respect to mutual funds exposure to debt papers.

"We (Sebi) have observed that perhaps mutual fund industry was not being very careful about the investments they are making in the debt products and the process they were following," he said here.

Noting that some improvement is needed in the functioning of credit ratings agencies and debenture trustees, Sinha said the regulator be issuing additional guidelines for the rating agencies soon.

"India is one of the first countries where rating agencies are regulated and the system prevalent here is robust. What we started looking at was that why is it that in certain cases, where the papers were being rated investment grade, suddenly the rating was suspended," Sinha said.

"May be there was genuine reason for suspending, I am not questioning it. But that has to be explained to investors and public at large. Our feeling was, that was not being done," Sinha said.

He also said that Sebi had raised certain red flags with its meeting with credit rating agencies including those with respect to conflict of interest.

"We had a meeting with all the ratings agencies and we have explained our concerns to them. There are one or two others areas for example... is there any conflict of interest in the rating process and you remember this was an issue globally as well at a time," Sinha said.

"I hope there is no such issue but we have flagged it to the rating agencies," he said.

At the same time, Sinha said debenture trustees should provide all relevant information to investors related to corporate bonds.

"Debenture trustees could also be having conflict of interest... May be, their group companies are also investors.

There are instances where they have favoured the money to their group company," Sebi chief said.

The issue has caught regulators' attention after J P Morgan Mutual Fund got into trouble due to its exposure to debt securities of debt-laden Amtek Auto, while a few other mutual funds have also faced similar problems with regard to corporate bonds of a few other distressed firms.

Markets regulator Sebi will soon issue norms allowing e-commerce platforms to sell mutual fund products, among other measures, to boost the MF industry.

The Securities and Exchange Board of India (Sebi) is also planning to implement know-your-client (KYC) procedure online, to simplify the process for mutual fund investors and attract wider number of customers.

Noting increase in use of e-commerce platform and low penetration of mutual fund products in the country, Sebi chairman U K Sinha said the regulator has "set up a committee under Nandan Nilekani which has had three rounds of meeting already", to suggest ways for boosting MF industry.

"Hopefully in next couple of months we will be coming out with a new set of regulations of distribution of product," Sinha said, adding that the aim was to make transactions in mutual funds "easy and convenient".

The new set of norms for mutual fund distribution are being worked on and "we will be able to bring about an entirely new paradigm in distribution of mutual fund products", he said.

Sinha was speaking at the Indian capital market conference organised here by industry body Ficci.

Noting that RBI had facilities to make online payments, while Aadhar also has electronic KYC process, Sinha said Sebi "is also we are looking at our KYC norms how to make it simple and make it online".

"We are looking to ensure that there is no need for in- person verification, no need to vet signature. Everything should be able to be done online," he said on the sidelines of the conference.

The mutual fund industry has been growing considerably over the last few years and has assets under management worth over Rs 13 lakh crore.

It has been felt however that a huge growth opportunity remains untapped especially among the retail investors.

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