Participation of mutual funds in repo in corporate debt securities
Summary
This circular permits mutual funds to participate in repo transactions involving corporate debt securities subject to specific regulatory conditions. It mandates exposure limits, rating restrictions, and tenor caps while requiring trustees and asset management companies to establish internal guidelines. Additionally, it imposes disclosure obligations on scheme information documents and periodic reporting to investors and SEBI.
Text
The Reserve Bank of India has issued the ‘Repo in Corporate Debt Securities (Reserve Bank) Directions, 2010’ which have been modified by subsequent RBI Circulars.
The said Directions have enabled mutual funds to participate in repos in corporate debt securities subject to the approval of the Securities and Exchange Board of India.
The gross exposure of any mutual fund scheme to repo transactions in corporate debt securities shall not be more than 10 % of the net assets of the concerned scheme.
The cumulative gross exposure through repo transactions in corporate debt securities along with equity, debt and derivatives shall not exceed 100% of the net assets of the concerned scheme.
Mutual funds shall participate in repo transactions only in AAA rated corporate debt securities.
Mutual funds shall borrow through repo transactions only if the tenor of the transaction does not exceed a period of six months.
The Trustees and the Asset Management Companies shall frame guidelines about, inter alia, the category of counterparty, credit rating of counterparty, tenor of collateral, and applicable haircuts.
Mutual funds shall ensure compliance with the Seventh Schedule of the Mutual Funds Regulations about restrictions on investments, wherever applicable, with respect to repo transactions in corporate debt securities.
The details of repo transactions of the schemes in corporate debt securities, including details of counterparties, amount involved and percentage of NAV shall be disclosed to investors in the half yearly portfolio statements and to SEBI in the half yearly trustee report.
The concerned Scheme Information Document shall disclose the intention to participate in repo transactions, the exposure limit for the scheme, and the risk factors associated with repo transactions in corporate bonds.
This circular is issued in exercise of powers conferred under section 11(1) of the Securities and Exchange Board of India Act, 1992, read with the provisions of regulation 77 of SEBI (Mutual Funds) Regulations, 1996.
Source: SecMarx — Participation of mutual funds in repo in corporate debt securities. Verbatim text is public record; SecMarx structuring (linkage to applying orders) is cited to us.