Following IL&FS crisis, SEBI has relaxed norms for mutual funds to deal with stressed assets.
In its latest move, the market regulator has allowed side-pocketing in mutual funds. In a press release issued today, SEBI said that the market regulator has noted the proposal to allow mutual funds to create segregated portfolios with respect to debt and money market instruments subject to various safeguards.
Side-pocketing is a practice in which fund houses can segregate risky assets from the rest of their holdings and cap redemptions. Simply put, fund houses can create two funds - one with risky assets where fund house will not allow redemption expecting recovery from stressed assets and another fund with other assets with existing features. This practice is prevalent among hedge funds in developed markets.
However, SEBI has kept it optional for fund houses. SEBI said, “Creating segregated portfolio may be optional for mutual funds but approval of trustees is necessary for activating such a portfolio.”
SEBI further said that creation of segregated portfolio is a mechanism to separate distressed, illiquid assets from other more liquid assets in a mutual fund portfolio to deal with a situation arising due to a credit event. With a segregated portfolio, investors who may take the hit when the credit event happens should get the upside of future recovery, said SEBI.
On mark to market valuation of debt securities, SEBI said that it has noted the proposal to review the valuation norms in debt and money market instruments.
Last month, Mutual Fund Advisory Committee (MFAC) gave these proposals to SEBI.
