SEBI on July 22 announced a slew of measures in an effort to bring in more transparency and regulation around debt mutual funds. These measures would work as a confidence booster for debt fund investors whose belief that debt funds have low risk has shaken after the Franklin fiasco. Low quality of credit of the underlying portfolio, as well as low liquidity of these papers in the bond market, made it difficult for Franklin to raise funds to honour redemptions and consequently it had to announce winding up of its 6 schemes.
In its circular, SEBI asked mutual funds to undertake at least 10 percent of their total secondary market trades by value in corporate bonds (excluding Inter Scheme Transfer trades) by placing/seeking quotes through one-to-many mode on the Request for Quote (RFQ) platform of stock exchanges.
As on date, all trades are executed between two parties over the counter at a pre-decided price and are facilitated by brokers.
Through an RFQ platform, buyers and sellers of debt securities put in a request or a bid/quote on a trading screen to carry out a trade. The party initiating the transaction can choose the number of counterparties it wants to do business with.
The seller of a corporate bond, for instance, can either choose to invite quotes from all market participants or a selected few using the platform. In our opinion, this 10 percent limit is just a starting point since today 0 trades are executed on the exchange; SEBI would gradually increase this limit and would ask funds to shift completely to the exchange platform. This is a very good measure as it would improve the liquidity of the bonds as well as lead to better price discovery.
Another important measure has been full portfolio disclosure on a fortnightly basis within 5 days of every fortnight and disclosure of the yield of each instrument. As on date, the portfolio is disclosed on a monthly basis by the 10
th of next month and the weighted average yield of the total portfolio is disclosed.
In our opinion, this measure would help mutual fund analysts and investors to identify risks much earlier in any fund and take the required action.
For instance, an instrument where the yield is increasing can be an indication that there is an issue with the credit profile of the issuer or the liquidity risk is high. Further, sharing the portfolio on fortnightly basis would also bring to notice, to some extent, the trading activity that is carried on by the fund managers during the month in an attempt to make trading gains.
As per the circular, the above measures have to be implemented from October 1st, 2020 and in our view, these measures are just the initial steps and one should expect more regulations for debt funds in the coming months.
—Shweta Rajani is Head–Mutual Funds, AnandRathi Private Wealth Ltd. The views expressed are personal