Review of norms regarding investment in debt instruments with special features and the valuation of perpetual bonds
Summary
This circular establishes prudential investment limits for mutual funds investing in debt instruments with special features, capping holdings at 10% of NAV and 5% per issuer. It mandates the inclusion of segregated portfolio provisions in Scheme Information Documents for schemes holding such instruments and defines trigger dates for write-offs or conversions. Additionally, it clarifies valuation standards for perpetual bonds, treating their maturity as 100 years and prohibiting close-ended debt schemes from investing in them.
Text
Debt instruments having special features such as subordination to equity or convertibility to equity upon a pre-specified event, which are otherwise Non-Convertible Debentures, may be treated as debt instruments until converted to equity.
No Mutual Fund under all its schemes shall own more than 10% of such instruments issued by a single issuer.
A Mutual Fund scheme shall not invest more than 10% of its NAV of the debt portfolio of the scheme in such instruments.
A Mutual Fund scheme shall not invest more than 5% of its NAV of the debt portfolio of the scheme in such instruments issued by a single issuer.
Investments in excess of the limits specified may be grandfathered, and such mutual fund schemes shall not make any fresh investment in such instruments until the investment comes below the specified limits.
Debt schemes which have investment in such instruments or have provision to invest in such instruments shall ensure that the Scheme Information Document (SID) of the scheme has provisions for segregated portfolio.
If the instrument is to be written off or converted to equity pursuant to any proposal, the date of said proposal may be treated as the trigger date; however, if without proposal, the date of write off or conversion may be treated as the trigger date.
On the said trigger date, AMCs may, at their option, create segregated portfolio in a mutual fund scheme subject to compliance with relevant provisions of SEBI Circular No. SEBI/HO/IMD/DF2/CIR/P/2018/160 dated December 28, 2018, SEBI Circular No. SEBI/HO/IMD/DF2/CIR/P/2019/127 dated November 07, 2019 issued with respect to ‘Creation of segregation portfolio in mutual fund schemes’ and any other relevant Regulations/Circulars/Guidelines issued in the future from time to time.
Asset Management Companies/Valuation Agencies shall ensure that the financial stress of the issuer and the capabilities of issuer to repay the dues/borrowings are reflected in the valuation of the securities from the trigger date onwards.
Bonds with call and/or put options shall be valued in line with the SEBI circular No. MRD/CIR/8/92/2000 dated September 18, 2000 irrespective of the nature of issuer. Further, the maturity of all perpetual bonds shall be treated as 100 years from the date of issuance of the bond for the purpose of valuation.
Close ended debt schemes shall not invest in perpetual bonds.
This Circular shall come into effect from April 01, 2021.
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Source: SecMarx — Review of norms regarding investment in debt instruments with special features and the valuation of perpetual bonds. Verbatim text is public record; SecMarx structuring (linkage to applying orders) is cited to us.