Mutual funds that use options strategies will now have to issue justification if they do not exercise a favourable put option.
"A justification for not exercising the put option shall be provided by the mutual fund to the valuation agencies, Board of AMC and trustees on or before the last date of the notice period," SEBI said in a circular issued on Friday.
The regulator said that a put option will be considered 'in favour of the scheme' if the yield of the valuation price ignoring the put option is more than the coupon rate by 30 basis points.
Certain debt securities have put options.
"This move will put pressure on AMCs and fund managers to effect the put option or provide justification for not exercising the option," said Joydeep Sen, corporate trainer (debt) and author. "If a fund manager doesn't exercise a favourable put option, valuation agency will have to take ultimate or last maturity as the maturity of the security," he added.
"Suppose, there is a five-year security with annual put option. If the fund manager decides not to exercise the put option during the first year, they will have to justify the decision. The valuation agency, on their part, will have to consider it as a four year security and not as a one year security during valuation," Sen explained.
The circular will come into effect from October 1, 2021.
