In its recent circular dated April 28, 2020, SEBI has eased the following compliances related to investment by mutual funds in unlisted Non-Convertible Debentures (NCDs).
Extension of timeline for compliance
SEBI, through its circular dated October 01, 2019 (October 2019 Circular) had required mutual funds to cap their investments in unlisted NCDs to a maximum of 10% of a scheme’s debt portfolio. In this regard, SEBI had prescribed a phase-wise implementation of this mandate, as a result of which, mutual funds were required to bring down their investment in unlisted NCDs to 15% by March 31, 2020 and to 10% by June 30, 2020. SEBI has now extended the deadline for compliance with the 15% and 10% thresholds to September 30, 2020 and December 31, 2020, respectively.
Trading in grandfathered unlisted NCDs across mutual funds
In its October 2019 Circular, SEBI had also mandated that all fresh investments in unlisted NCDs, up to a maximum of 10% of the scheme’s debt portfolio, were required to be made only in NCDs with simpler structures, i.e. with fixed and uniform coupon, fixed maturity period, without any options, fully paid upfront without credit enhancements or structured obligations, rated and secured with coupon payment frequency or monthly basis, etc.
However, investments of mutual fund schemes in unlisted NCDs as on the date of the October 2019 Circular were allowed to be grandfathered till the maturity date of such NCDs. SEBI has now clarified that mutual funds can transact in such grandfathered unlisted NCDs, whether or not they meet the simple structure criteria stated above, provided investment due diligence and all other applicable investment restrictions are complied with.
This is a positive move undertaken to ease the stress on the mutual funds industry on account of the Covid-19 pandemic.