A Stitch In Time: SEBI Allows Mutual Funds To Segregate Distressed Assets In The Wake Of IL&FS Crisis

Securities and Exchange Board of India (SEBI) has come up with the concept of side-pocketing, which allows segregation of portfolio to separate distressed assets from liquid part of a mutual fund scheme, Economic Times has reported. This move has been taken in the wake of IL&FS liquidity crisis.

“This provision has been triggered by the crisis at non-banking finance company (NBFCs). So, it is for the interest of retail investors that the toxic assets are segregated from the assets which are doing well. We think it is an appropriate time to introduce this provision,” Chairman of SEBI, Ajay Tyagi, explained the recent change in regulation.

In addition to this, the regulator also decided to issue a consultation paper on bringing uniformity in valuation process of corporate bonds. The regulator will also look into the valuation of distressed assets and debt exposures of mutual fund schemes.

Whole-time member of SEBI, Madhabi Puri Buch, said that the improvement was needed in two important areas. The first is the valuation of bonds and papers which have maturity period of less than 60 days, and papers which get downgraded below investment grade. The changes are required as the current guidelines are generic.