Fund houses can now create segregated portfolio through side pocketing in debt funds having exposure to high rated companies opting for debt restructuring due to covid-19.
Earlier, fund houses were allowed to create side pocketing in debt schemes only in case of a credit event, which includes downgrade to below investment grade and subsequent downgrades in credit rating by the SEBI registered Credit Rating Agency.
“The date of proposal for restructuring of debt received by AMCs shall be treated as the trigger date for the purpose of creation of segregated portfolio,” SEBI said in a recent circular.
Debt restructuring is process of reducing interest rates on loans or extending the due dates for liabilities to avoid default.
Debt expert Joydeep Sen explains that this is simply an enabler. Earlier, side pocketing was allowed in a debt scheme only if its securities get downgraded to below investment grade rating. Now, through this circular, SEBI has allowed side pocketing even in those debt schemes that hold higher-rated securities. However, fund houses can do side pocketing only if one of the higher-rated companies opts for debt restructuring.
Experts feel segregating such securities that go for restructuring would give fund houses some comfort. Currently, fund managers have to sell these securities at a steep discount. Instead, they can create side pocketing in the troubled scheme and ensure that only those investors who were invested in the fund before the announcement of the debt restructuring plan get the benefit from the recovery.
The modification to side pocketing rules comes into effect immediately and will remain in force until December 31, 2020.
