JOIN USMarket regulator Securities & Exchange Board of India (Sebi) has changed the norms for valuation of debt securities held by mutual funds (MF) — a development following which the fund houses would be needed to value their funds nearer to market levels.
The regulator shifted back to its valuation norms practiced till October last year, when it had allowed the fund houses to use a wider margin in valuing their debt securities.
With the latest change in the permissible mark-up and mark-down levels — the margins allowed above and below the exact market value — the fund houses would be allowed lesser margin levels. There have been reports that fund houses have been inflating their net asset values, and subsequently the asset under management size, by taking advantage of wider margins allowed in calculating the value of the debt securities.
As per the new norms, MFs would be allowed a mark-up (the upward permissible margin) of 100 basis points and a mark- down of 50 basis points (the downward margin) for rated debt securities with maturity duration of up to two years.
Earlier in October 2008, Sebi had raised the mark-up and mark-down for such securities to 500 basis points and 150 basis points, respectively.
For the rated instruments with over two years duration, the mark-up and mark-down have been cut down from 400 basis points to 75 basis points and from 100 basis points to 25 basis points, respectively.
Besides, for the unrated debt securities with duration of up to two years, mark-up discretionary discount has been cut down to up to 50 basis points, from 450 basis points previously. For the unrated debt securities with duration of over two years, the discretionary discount has been lowered from 375 points currently to up to 50 basis points.
Reflect current milieu
The discretionary discount is applicable over and above a mandatory discount of 50 basis points for securities with duration of up to two years and 25 basis points for those above two years of duration. All the new levels proposed by the Sebi are similar to those in practice till the norms were changed on October 18, 2008. Sebi said that these steps have been taken “with a view to ensure that the value of debt securities reflect the current market scenario in calculation of net asset value.”
Sebi also said for cases where on the date of this circular, the increased discretionary mark up or down limit is being used, it should be brought back to the proposed levels within a period of two months.