The Securities and Exchange Board of India (Sebi) has decided to permit creation of segregated portfolio or 'side-pocket' of unrated debt or money market instruments by mutual fund schemes. Market regulator in its circular on Thursday said, "Segregated portfolio of such unrated debt or money market instruments may be created only in case of actual default of either the interest or the principal amount.
In its circular in December 2018, Sebi had permitted creation of segregated portfolio of debt and money market instruments by MF schemes. Segregation of portfolio was allowed subject to conditions like credit event at issuer level, which is a downgrade in credit rating by credit rating agency or downgrade of a debt or money market instrument to the 'below-investment grade’.
"As per SEBI circular dated December 28, 2018, credit event is considered for creation of segregated portfolio. However, for the purpose of this circular, 'actual default' by the issuer of such instruments shall be considered for creation of segregated portfolio," said Sebi in its circular on Thursday. Market participants say this circular will bring in more clarity as earlier there was no announcement made with regard to investments in unrated debt instruments.
Sebi also said AMCs shall immediately inform the Association of Mutual Funds in India (Amfi) about the actual default by the issuer. On being informed about the default, Amfi shall immediately inform the same to all asset management companies (AMCs). Side-pockets separate stressed assets from other investments and cash holdings.
The side-pocketing ensures that while some of the investor money in a debt mutual fund scheme linked to stressed assets gets locked until the fund recovers money from the stressed company, investors are free to redeem their money from other investments.
"Creation of segregated portfolio shall be optional and at the discretion of the AMC. It should be created only if the scheme information document (SID) of the scheme has provisions for segregated portfolio with adequate disclosures. All new schemes to be launched after the date of this circular shall have enabling provisions included in the SID for creation of segregated portfolio," said Sebi in its circular. This new provisions will be effective with immediate effect.