Last Updated on
♦ Security Exchange Board of India tightens regulations for mutual funds to safeguard investors
♦ Security Exchange Board of India sets new rules for applicant confidentiality in resolution process
♦ RBI scraps charges on NEFT, RTGS transfers
♦ RBI fines HDFC Bank Rs 1 crore for violation of KYC norms
The markets regulator on Thursday tightened investment norms for liquid mutual funds to protect investors from credit risks arising out of defaults by borrowers.
The Securities and Exchange Board of India (SEBI) said liquid funds can invest a maximum of 20% of their assets in a single sector as against the current cap of 25% and must keep aside at least a fifth of their assets in cash equivalents to meet sudden redemption pressures. Liquid funds are debt mutual funds that can invest in securities up to a maturity of 91 days.
“Mutual funds investment is different from bank lending and it needs to have elements of safety as well as investment,” SEBI chairman Ajay Tyagi told reporters after a meeting of the regulator’s board.
The changes are based on recommendations made by the mutual fund advisory committee constituted by SEBI to limit liquid fund exposure to a single sector, especially to non-banking finance companies (NBFCs) catering to the housing sector. Mint had reported on 21 June that SEBI was reworking the sectoral caps based on the recommendation of the panel.
As a liquidity crisis engulfed India’s shadow banking industry following payment defaults by Infrastructure Leasing and Financial Services Ltd, mutual funds that had lent heavily to the non-bank lenders raced to cut their exposure. Questions have been raised about the safety of 13.24 trillion of assets under management (AUM) of debt funds. Mutual funds continue to have a massive 3.12 trillion exposure to NBFCs and housing finance companies.
SEBI’s latest changes will have a significant impact on India’s 25.93 trillion mutual fund industry, which has to comply with the new sectoral caps from September 2020.
SEBI has also reduced liquid funds’ exposure to the so-called credit-enhanced securities to 10% of AUM. A credit enhancement is typically a promoter guarantee or the offer of shares as collateral in order to enhance the creditworthiness of specific debt paper. These are also referred to as loan against shares (LAS).
The mutual fund industry currently has an exposure of around 50,000 crore to loans against shares, a form of credit enhancement often availed by promoters. These securities will need to carry a cover of 4:1, which typically now stands at 2:1.
Tyagi also said SEBI does not recognize standstill agreements between mutual funds and company promoters.
“We have started adjudication proceedings against two fund houses where two fixed maturity plans (FMPs) were impacted. As and when these cases (violations) come to light, the same direction will be followed for all cases. Our position is very clear,” said Tyagi.
Currently, 12 FMPs of ICICI Prudential Mutual Fund and 12 FMPs of Aditya Birla Sun Life Mutual Fund are maturing after September, when the standstill agreement comes to an end, according to data on 28 February. It will also be mandatory for all mutual fund schemes post September 2020 to invest only in listed non-convertible debentures and commercial papers, a measure aimed at more transparency.
“Going from unlisted to listed is not difficult, it just requires more disclosures,” said Tyagi.
Industry experts said that a sizeable number of mutual funds have voluntarily adopted the changes that were introduced on Thursday. “Most of the regulatory changes were already brought into effect by mutual funds,” said a fund manager, who did not wish to be identified. “Liquid funds already invest 10-15% in bills, which is a cash equivalent. The mark-to-market rule will not be immediately enforced, I expect it will take 6-9 months. The hike of cover to four times for credit enhanced securities will make the loan against shares market for MFs unviable. Promoters anyway get loans against 2x cover from NBFCs.”
Liquid and overnight schemes cannot invest in short-term debt and money market instruments, according to the new rules.
If investors exit liquid schemes within seven days, then they will be subjected to an exit load.
SEBI has also finalized a uniform valuation policy for debt instruments. Currently, once the security falls below the investment grade, fund managers end up writing off papers as per their discretion. The new valuation framework hopes to do away with that. Own trades or so-called self-trades will also not be allowed to boost valuation of the paper.
Markets regulator SEBI has set various grounds on the basis of which an applicant can be assured confidentiality while filing a plea under the settlement mechanism.
In a circular, the regulator also listed the factors that can adversely affect the applicant’s claim for confidentiality.
“In order to assure confidentiality to an applicant who provides assistance in examination proceedings, the Board may assess the information/assistance/cooperation rendered during such examination proceedings” by considering various factors such as nature of assistance provided and gravity of the matter,” SEBI said in the circular on Tuesday.
For the confidentiality, the regulator will assess whether the co-operation was provided before the applicant had knowledge of any pending proceedings.
The other factors such as whether the provided information was truthful, complete and reliable will be ascertained. While taking into cognisance the gravity of matter, factors like nature and type of defaults under the securities laws, age of applicant, repetitive nature of defaults and the effect of defaults on investors will be considered.
Further, the regulator while laying down the grounds for rejection of confidentiality said that history of securities laws’ violations by the applicant, and the plausibility of the reasons for the applicant to delay reporting of the violations of the securities laws, among other factors, will be taken into account
The Reserve Bank of India 30th may 2019 announced it was waiving off charges that are applied on bank transfers carried out either by National Electronic Funds Transfer (NEFT) or Real Time Gross Settlement System (RTGS). The central bank asked consumer banks to pass on this benefit to customers, essentially asking banks to NEFT and RTGS transfers free of cost.
There may be even more good news for customers as far as charges on transactions are concerned. The RBI announced it was setting up a panel to review charges imposed by banks on ATM withdrawals.
These announcements were made at the end of the RBI’s bi-monthly monetary policy meeting. The RBI announced a reduction of 25 basis points in the repo rate. The repo rate, which is the interest rate at which the central bank lends money to commercial banks, now stands at 5.75 per cent. The RBI’s rate cut see interest rates on home and car loans come down.
While announcing the scrapping of charges on RTGS and NEFT transactions, the RBI said it was doing so to boost digital transactions.
The Real Time Gross Settlement System (RTGS) is meant for large-value instantaneous fund transfers while the National Electronic Funds Transfer (NEFT) System is used for fund transfers up to Rs 2 lakh.
The State Bank of India (SBI) currently charges between Re 1 and Rs 5 for NEFT transactions and between Rs 5 and Rs 50 for RTGS
In its statement on developmental and regulatory policies after the Monetary Policy Committee’s meeting, the RBI said it levies minimum
charges on banks for transactions routed through RTGS and NEFT system for other fund transfers.
Banks, in turn, levy charges on their customers.
In order to provide an impetus to digital funds movement, it has been decided to do away with the charges levied by the RBI for transactions processed in the RTGS and NEFT systems, it said.
“Banks will be required, in turn, to pass these benefits to their customers. Instructions to banks in this regard will be issued within a week,” the central bank said.
Reserve Bank Tuesday fined country’s largest private sector lender HDFC Bank Rs 1 crore for not reporting frauds and noncompliance with other directions. The fine pertains to submission of forged bill of entries (BoEs) by certain importers to HDFC Bank for remittance of foreign currency, the RBI said.
“Examination in this regard revealed violations of RBI directions on ‘KYC/AML norms’ (know your customer/anti-money laundering) and on reporting of frauds,” RBI said on its website.
A notice was issued to HDFC Bank on why monetary penalty should not be imposed for non-compliance with the directions, the apex bank said. The fine was imposed through an order last Thursday after considering HDFC Bank’s reply, oral submissions made during the personal hearing and additional submission made, the apex bank said. The penalty has been imposed in exercise of powers vested in RBI under the provisions of Section 47A(1)(c) read with Section 46(4)(i) of the Banking Regulation Act, 1949, it said.
“This action is based on deficiencies in regulatory compliance and is not intended to pronounce upon the validity of any transaction or agreement entered into by the bank with its customers,” the RBI clarified. In a statement to exchanges, HDFC Bank said it has “taken necessary measures to strengthen its internal control mechanisms so as to ensure that such incidents do not recur”.
Interested in this topic or wanting to know more? Share your thoughts and we will be happy to assist.