Mutual Fund Portfolio Segregation Norms Changed Amid COVID-19

On Wednesday, the Securities and Exchange Board of India (SEBI) modified the norms pertaining to segregation of portfolio in mutual funds by asset management companies amid the coronavirus pandemic.

Segregation in a portfolio is normally performed to separate the distressed assets from more liquid assets.

In the wake of the pandemic, the watchdog said the trigger date for segregation of portfolio would be the date on which proposal for debt restructuring was received by the asset management company (AMC).

It has also been allowed to side pocket debt (that is segregation of MF units in lieu of debt) in cases where borrowers have approached the AMC for debt restructuring. Earlier, restructuring was only allowed on debt downgraded below investment grade (rating below BBB-) or defaulted debt.

The latest modifications, that is effective immediately, would be in place till 31 December 2020.

The new modifications come in the light of the permission given by RBI on the restructuring of stressed debt affected by COVID-19.

On 6 August, RBI permitted lending institutions to extend the resolution facility to borrowers having stress on account of COVID-19.

Further, on 31 August, SEBI said that if a credit rating agency is of the view that the restructuring by the lenders/ investors is solely due to COVID-19 related stress or under the RBI framework, then the agency need not consider the same as a default event.

Against this backdrop, SEBI has issued the circular to partially modify the norms related to segregation of portfolio.