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As per the powers granted to SEBI under Section 11(1) of the SEBI Act 1992, read with provisions of regulation 77 of the SEBI (Mutual Funds) Regulations 1996, has reviewed the norms of investment in instruments having special features or segregated portfolio & perpetual bonds.
The same was notified in the SEBI circular no. SEBI / HO / IMD / DF4 / CIR / P / 2021 / 032. The circular that deals with norms of investment is discussed in details in the article.
The following entities are eligible for the SEBI circular related to norms of investment are:
The mutual funds invest in debt instruments having special features that include subordination to equity or convertible to equity upon the trigger of a predetermined event for the loss absorption.
Additional Tier – I & Tier – 2 bonds are issued under the Basel III framework are some of the instruments may have special features. The debts having such special features (known as Non – Convertible Debentures), may be considered as debts instruments till they are converted to equity.
Presently, there are no specific investment threshold limits for debt instruments having special features. Thus, the following threshold limits have been set out for such instruments, these are:
The investments threshold limit mentioned above for a mutual fund scheme will be within the limit or threshold for debt instruments issues by single user according to the clause 1 of 7th schedule of the SEBI (Mutual Fund) Regulations 1996 & other limits related to the debt instruments.
The mutual fund scheme that invested in the instruments above the limits prescribed, then that mutual fund scheme will not invest in such instruments until it does not come within prescribed limits.
The debt schemes having an investment in such debt instruments must ensure that the SID (Scheme Information Document) has the provisions of segregated portfolio.
It must be noted that provisions that are allowed to create the segregated portfolio in the existing schemes will be subject to comply with Regulation 18 (15A) of the SEBI (Mutual Funds) Regulations 1996.
The debt instruments must be written off or converted to the equity without a proposal & the date of write off or conversion will be considered the trigger date. It must be noted that on the trigger date, a segregated portfolio must be created in a mutual fund scheme that must be complied with the relevant provisions of the Mutual Fund schemes or any other regulations / circulars / guidelines issued by the board in future:
Further, it is evident to note that the Asset management Companies or Valuation Agencies to ensure the financial stress of an issuer & the capabilities will repay the dues or borrowings that started from the trigger or commencement date.
Valuation of Perpetual Bonds
SEBI circular No. MRD / CIR / 8 / 92 / 2000 that was issued on 18th September, 2000, explained clearly about the valuation of the perpetual bonds with call & put options, irrespective of the issuer’s nature.
Further, it must be considered that the maturity of the perpetual bonds will be treated as 100 years that will start from the date of issuing the bond for valuation.
In furtherance, SEBI circular No. SEBI / IMD / CIR No 12 / 14732 / 08 issued on 11th December, 2009 allows the closed – ended debt mutual funds to invest in the securities that matures before the maturity date. As a result of which the close – ended schemes will not invest in perpetual bonds.
Concisely, SEBI under the ambit of powers given to it, as per section 11(!) of the SEBI Act, 1992 read with Regulation 77 of the SEBI (Mutual Funds) Regulations 1996, passed a circular reviewing the norms of investment in instruments having special features, segregated portfolio & perpetual bonds.
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