SEBI limits mutual fund investment in debt instruments with special features

The Securities and Exchange Board of India (SEBI) on Wednesday put a limit on mutual funds' investment in debt instruments with special features like Additional Tier 1 (AT1) and Additional Tier 2 (AT2) bonds.

Till now, there were no specified investment limits for these instruments with special features which may be riskier than other debt instruments.

Accordingly, SEBI said mutual funds cannot own more than 10 per cent of such instruments issued by a single issuer. Besides, a mutual fund scheme cannot invest more than 10 per cent of net asset value (NAV) of the debt portfolio of the scheme in such instruments and more than 5 per cent of NAV in such instruments issued by a single issuer, a circular, which will come into effect from April 1, said.

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The restrictions are for debt instruments with special features like subordination to equity and/or convertible to equity upon trigger of a pre-specified event for loss absorption.

"The investments of mutual fund schemes in such instruments in excess of the limits specified...on the date of this circular 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," the circular said.

Investors of YES Bank's AT1 bonds had lost over Rs 8,000 crore last year as the Reserve Bank of India decided to write-off those bonds as part of the bank's rescue plan.

In its circular, SEBI also asked mutual funds to have provision for segregated portfolio in the scheme information document of debt schemes that invest in such instruments.

The market regulator also asked close ended debt schemes to not invest in perpetual bonds.

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