SEBI will soon prescribe guidelines on pricing corporate bonds. All mutual funds will have to follow the valuation methodology. This will ensure uniformity in terms of valuation of corporate bonds across mutual funds.
Moreover, SEBI would develop a supervisory and regulatory framework for pricing agencies, which would provide corporate bond pricing services related to mutual funds.
Since debt securities are illiquid in nature and not traded like equities, mark-to-market valuation is challenging for fund houses since they have to quote NAV on a daily basis. Hence, most fund houses rely on rating agencies to derive NAV. Often rating agencies look at accrual to value debt securities. Credit rating agencies reflect the rating agencies’ opinion about the credit risk of debt securities based on historical data and some assumptions about the future, which tends to underplay the possibility of default.
Following IL&FS default, SEBI wants to reduce risk in debt funds. One of the proposals being reportedly considered is allowing mark-to-market valuation of debt securities having maturities of less than 60 days.
Furthermore, the pricing agencies may seek advice from MFs while evaluating the fair price of illiquid lower rated instruments. SEBI’s proposal to develop a framework for pricing agencies might help bring better transparency and uniformity in this segment.
Devang Shah, Deputy Head - Fixed Income, Axis MF believes that the uniformity in valuation of corporate bonds across all financial market participants is a positive step, which will benefit investors.
For some time now, there were discussions around implementation of uniform bond pricing shared Killol Pandya, Head - Fixed Income, Essel Mutual Fund. "The effecting uniform price mechansim will impart greater transparency and facilitate better risk management across the industry. It is too early to tell what form or fashion the new guidelines will take and we will have to wait until the SEBI circulars come out,” he added.
