With a mandate to safeguard investors' interest, the
Securities and Exchange Board of India (SEBI) has notified Circular
No SEBI/HO/IMD/DF2/CIR/P/2016/35 dated 15 February 2016 (Circular)
tightening its norms for mutual funds' exposure to riskier
Applicability of the Circular
The revised investment restrictions at the issuer, sector and
group level would be applicable to all new schemes and fresh
investments by existing schemes from the date of the Circular,
while the existing schemes will have to comply with the new norms
within a period of one year.
What are the changes introduced by the Circular?
In a previous amendment on 12 February 2016, SEBI had imposed
restrictions on mutual fund investments in debt instruments
comprising money market instruments and non-money market
instruments issued by a single issuer which had not been rated
below investment grade. This amendment has reduced the
concentration limit of 15% of net assets value (NAV) of the scheme
to 10% of NAV, which may be extended to 12% with the prior approval
of the Board of Trustees and the Board of Asset Management
Now, additional prudential limits have been imposed for sectoral
exposure by debt oriented mutual funds. Exposure limits to a single
sector have been reduced from 30% to 25% and additional exposure
limits provided for Housing Finance Companies (HFCs) in finance
sector have been reduced from 10% to 5%. The additional exposure to
such securities issued by HFCs has to be rated 'AA' and
above and these HFCs should be registered with the National Housing
Bank (NHB). The total investment/ exposure in HFCs shall not exceed
25% of the net assets of the scheme. Investments in Banks
Certificates of Deposit (CDs), Collateralized Borrowing and Lending
Obligation (CBLO), Government Securities (G-Secs), Treasury Bills
(TBills), short term deposit of commercial banks and 'AAA'
rated securities issued by Public Finance Institutions and Public
Sector Banks are excluded from these limits.
A limit of 20% (25% with the prior approval of the Board of
Trustees) of the net assets of the scheme has also been introduced
for mutual funds investing in debt securities for group-level
investment (other than those in securities issued by Public Sector
Undertakings, Public Financial Institutions and Public Sector
Banks). "Group" for this purpose has the same meaning as
under Regulation 2 (mm) of SEBI (Mutual Funds) Regulations, 1996
and includes an entity, its subsidiaries, fellow subsidiaries, its
holding company and its associates.
The Circular is intended as a step towards providing mutual fund
investors enhanced diversification benefits by reducing
concentration risk. The measures are as a result of the recent
Amtek Auto events. With the approaching financial year-end, the
mutual fund industry is in redemption mode and new investments will
need to be carefully calibrated to comply with the enhanced
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