SEBI on Friday has issued norms for valuing securities having rating below BBB- (below investment grade securities have rating lower than BBB-). This is the second time in the last few months that SEBI has announced change in valuation of debt and money market securities. Earlier, SEBI had introduced stricter norms for liquid funds.
These moves come in the aftermath of IL&FS default. Industry experts share that currently there were no clear guidelines on valuing below investment grade papers. In the immediate aftermath of IL&FS downgrade, fund houses adopted different methodologies to value these securities. The date from which haircut was applied also varied across fund houses. These new guidelines will help bring uniformity and consistency in terms of valuation of securities, which have been downgraded below investment grade.
Haircut is mutual funds writing off the principal amount and the interest in case a security defaults.
According to the new guidelines,
- All money market and debt securities, which are rated below investment grade will be valued at the price provided by valuation agencies.
- While a rating agency may need some time to price the security, mutual funds need to revalue it on the day of the event based on an indicative haircut.
- If there are trades between the day of the credit event and the receipt of valuation price from valuation agencies, mutual funds should consider the price, which is lower of traded price and price post standard haircut.
- Similarly, if the traded price is lower than the price provided by the valuation agencies then the traded price will be considered for valuation. In the above two cases, the trades should be of a minimum size as determined by valuation agencies.
- Fund houses can deviate from the above guidelines; however, they need to provide a detailed rationale for the deviation.
Dwijendra Srivastava, Chief Investment Officer (Debt), Sundaram MF welcomes the new regulations introduced by SEBI. According to him, MFs are daily traded products; hence, the value of their portfolio needs to mirror the true market value of their investments. These norms will help MFs correctly value their portfolio and bring in uniformity across all fund houses in valuing below investment grade papers.
Dhawal Dalal, CIO – Fixed Income, Edelweiss MF shared that so far, valuation agencies did not provide valuation for papers rated below BBB-. This brought in a disparity in terms of valuation of these securities among different MFs. According to him, the new regulations will bring in uniformity in terms of valuation. In addition, the option for mutual funds to value these securities more conservatively is an added plus. “Previously there were only a few below investment grade securities in portfolios of different fund houses. The new guidelines give fund houses tools to address the different scenario,” he added.
Mahendra Kumar Jajoo - Head - Fixed Income, Mirae Asset MF believes that only fund houses having below investment grade securities in their portfolio will be impacted by these regulations. “However, these guidelines combined with the sidepocketing guidelines will enable mutual funds to better handle credit events,” he added.
SEBI has provided valuation agencies 90 days to develop a framework for valuing below investment grade papers.
