SEBI comforts debt MFs by easing valuation norms

The capital market regulator, Securities and Exchange Board of India (SEBI) has given a breathing space to debt funds by easing the valuation norms. This will allow valuation agencies to decide if a delay in payment will tantamount to be default after looking the reason for delay in its payment of interest or principal. If they believe that the delay is due to COVID-19-related lockdown, they may not consider it as a default. The valuation agencies appointed by the Association of Mutual Funds in India (AMFI) provide a valuation of the money market and other debt securities and recognise default of securities to mutual fund houses.

In a circular issued on April 23, SEBI suggested that differentiation of treatment should be made for payment delays. If it is due to the lockdown or loan moratorium, it should be treated differently and not considered as a default.

However,  in the scenario, as stated above,  if there is any difference in the valuation of securities provided by two valuation agencies,  the conservative valuation shall be accepted.

According to the circular, “In view of the nationwide lockdown and the three-month moratorium/deferment on payment permitted by Reserve Bank of India (RBI), a differentiation in treatment of default, on a case-to-case basis, needs to be made as to check whether such default occurred solely because of the lockdown or loan moratorium.”

This will help many debt funds. In the absence of such guidance, the debt funds would have taken a hit on their net asset values due to the markdown of the papers.  Now, they can ward off this for a while.