IL&FS impact: Mutual funds' exposure to group NBFCs under Sebi scanner

The Securities and Exchange Board of India (Sebi) is looking into the exposure taken by certain fund houses to debt papers of their own group’s non-banking financial companies (NBFCs), said people privy to the development. 

In some cases, the exposure of a debt scheme to its group’s NBFCs is as high as 12 per cent of the scheme's total corpus. 

Further, some of these investments are in papers that are rated AA; known to be relatively less liquid.

While Sebi guidelines are not clear on the exposure limits to multiple group companies operating in the same sector, they restrict exposure to debt instruments of a single issuer to 10 per cent of a scheme’s net asset value (NAV).

Sources said Sebi is closely monitoring lapses in risk management and could even come out with more specific guidelines, if needed.

Illustration by Ajay Mohanty
Officials in the mutual fund industry are already discussing ways to mitigate risks so that investor money stays protected.

“One of the ways in which fund houses can avoid credit risks is by avoiding concentrated exposures to AA or lower-rated papers,” said a senior official of a large-sized fund house.  

Experts say while regulatory guidelines on this front would be helpful, investors should closely monitor the portfolio of the schemes.

“More clarity on the regulatory front will help in dealing with the risks related to such concentrated group exposures. For investors, they must avoid schemes where the same short-term papers are getting rolled over or multiple schemes of a fund house are having exposure to debt papers of group companies across different maturities. Such transactions should raise questions in the investor’s mind,” said Vidya Bala, head of mutual fund research at FundsIndia.  

The IL&FS default has put the spotlight on risk-management practices in the Rs 22-trillion mutual fund industry. Some fund houses had taken significant exposure to debt papers issued by IL&FS and its subsidiaries. These schemes had to take sharp haircut on their exposures following the multi-notch downgrade of parent IL&FS. As these markdowns impacted NAVs of the schemes, investor returns were also hit.

Moreover, the default of IL&FS, which had a quasi-sovereign status, created a liquidity crunch for NBFCs that rely heavily on the corporate bond market. Some AAA rated debt papers of NBFCs saw a spike of 200-300 basis points in their yields. The tight liquidity environment made it difficult to even offload commercial papers of duration of as low as one or two days.

Debt fund managers have been scaling back their investments in NBFCs in recent months. Data from Sebi shows that fund houses cut their exposure to debt papers of NBFCs by Rs 220 billion in September. The exposure of debt schemes to NBFC papers stood at Rs 2.27 trillion in September, down from Rs 2.66 trillion in July.

 
The fear of contagion risk from the IL&FS default led to large outflows from the liquid and income schemes in September. The combined net outflows from these plans amounted to Rs 2.4 trillion, which was 10 per cent of the industry’s total assets under management as of August.

While experts suggest that the MF industry was largely able to meet the redemption requests this time, industry officials are putting proposals in place so that the industry is better-equipped to deal with risks.


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