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Sebi to soon act decisively on the crisis in debt fund mart

By Ruchi Bhatia

Market regulator Sebi may could soon step into the crisis in debt mutual funds, after Kotak AMC and HDFC AMC rolled over some of their fixed maturity plans (FMP), putting investors‘ money at risk. Sources told ETNow that Sebi could soon unveil fresh directives to reign in mutual funds acting like banks.

“Mutual funds are not banks. They do not have capital adequacy ratio like banks, neither do they have the adequate expertise to evaluate risks. So why should investors’ money be put at stake,” said a Sebi official who is in the know of the development.

ETNow learnt that the new directive will ensure higher disclosures in case of a default by companies and will also aim to cap exposure to debt securities of a single company. To ensure higher transparency and accountability by mutual funds, Sebi may ask MFs to devise a mechanism to reflect risks on the NAV (net asset value).

Sebi’s new directive may also ensure that collaterals taken by mutual funds for lending to corporates are done in a clean manner, and not via complex structures. “Clean collaterals can be monetised and will ensure investors’ money is not at risk”, the official said.

“Irrational exuberance of mutual funds while lending has resulted in the current crisis. Debt funds have been facing issues as they do not disclose information regularly. Neither do they have the expertise to evaluate credit. The government is seized of the crisis in debt mutual funds and in the NBFC space and is watching the developments,” India’s Chief Economic Advisor KV Subramanian told ETNow.

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