India’s Securities and Exchange Board (Sebi) has issued unlisted non-convertible debentures (NCDs), where mutual funds are mostly the investors, a three-month one-time window for listing has been allocated to such schemes.
A letter was sent to asset management companies late Tuesday, acoording to SEBI, stating that , starting June 15, a window would be made available to issuers who have outstanding unlisted NCDs as of March 31 without having to comply to the requirement and the guidelines on the electronic bidding platform. Mutual funds are however required to keep issuers informed of this window.
According to a copy of the letter with LiveMint , the letter stated “This is another step towards ensuring that debt mutual fund schemes hold only 10% in unlisted debt. Mutual funds have time till end of December to comply with the norms. The existing unlisted remains grandfathered. The listing would entail higher compliance and disclosures.”
The schemes had to meet the investment limits for non-listed non-convertible debentures (NCDs) at 15 percent and 10 percent of the debt portfolio by 31 March and 30 June respectively. These dates were subsequently extended to 30 September and 31 December respectively due to COVID-19 related disruptions. This additional move is to have liquidity for certain papers that are not listed. Exchanges require for the listing of fresh NCDs and not current unlisted ones, said asset management company’s CEO.
“In addition, it permitted mutual funds to grandfather the existing investments in unlisted debt instruments till maturity of such instruments, so as to not disrupt the market,” said Sebi.
According to Sebi communication, if issuers of non-listed NCDs take advantage of the opportunity of one-time listing and submit their application for listing but unduly delay in getting their NCDs listed, they would be required to pay additional 1 percent coupon to investors. On Wednesday the Asset Management Companies (AMCs) were advised by the Association of Mutual Funds in India (AMFI) that they would take full advantage of the opportunity and act immediately.
“There are about 121 companies which haven’t listed their debs. Franklin Templeton is the largest owner of unlisted debts among mutual fund houses. We will request all of invester companies to list their debts,” said the CEO of a large fund house, anonymously.
MF industry holds about 41,500 crore of non-listed NCDs in all schemes, excluding liquid schemes as of March 31. The six debt schemes that are under the winding-up process hold a large chunk of these unlisted debts. Many of these NCDs are issued and used to be considered liquid investments by marquee issuers. Those have been illiquid in the new covid-19 scenario due to market uncertainty, raising problems for the mutual funds.
“Further, some of the same issuers’ listed NCDs issued after 1 October trade regularly, but the unlisted NCD of the same issuer with the same rating and potentially a shorter maturity has become completely liquid. This has been adversely impacting the performance of various mutual fund schemes investing in debt instruments,” said an AMFI member.
“While Sebi has facilitated listing of unlisted NCDs many marquee issuers such as Tata Sons are unwilling to list their bonds. Perhaps they would make up the 10% of the unlisted debt still allowed,” said an official of a fund house.