The Securities and Exchange Board of India (SEBI) has introduced tightened norms for the close to Rs 26 lakh crore mutual fund (MF) industry. In the wake of the recent credit events in the fixed income market that had spiked MF liquidity risk, SEBI had constituted working groups representing AMCs, industry and academia to review the risk management framework with respect to liquid schemes as well as an internal working group to review norms for MF investment in various debt and money market securities. "The measures we have taken will help revive the confidence of investors, especially those investing in debt MFs," said Ajay Tyagi, SEBI Chairman. Based on the recommendations thrown up by these groups, SEBI approved of a host of changes at its June 27 board meeting. Here are the key proposals that got the nod:

• All liquid schemes have to hold at least 20 per cent in liquid assets such as cash, government securities (G-Secs), treasury bills and repo on G-Secs.
• A debt scheme can only invest up to 20 per cent of its assets in one sector. The sectoral cap was previously higher at 25 per cent. Also, the additional exposure of 15 per cent to housing finance companies (HFCs) has been restructured to 10 per cent in HFCs and 5 per cent exposure in securitised debt based on retail housing loan and affordable housing loan portfolios.
• The regulator has changed the valuation methodology for debt and money market instruments to mark-to-market, doing away with amortisation entirely.
• Liquid and overnight schemes will no longer be permitted to invest in short-term deposits, debt and money market instruments having structured obligations or credit enhancements.
• A graded exit load will be levied on investors of liquid schemes who exit the scheme up to a period of seven days.
• MF schemes will now be mandated to invest only in listed non-convertible debenture (NCDs). In addition, all fresh investments in commercial papers (CPs) and equity shares will only be allowed in listed securities pursuant to issuance of guidelines by the regulator.
• At least four-times security cover is mandatory for investment by MF schemes in debt securities having credit enhancements backed by equities directly or indirectly. MFs so far offer a cover of 1.5-2 times for loans against shares, the Business Standard reported. Moreover, prudential limits on total investment by such schemes in debt and money market instruments having credit enhancements as percentage of their respective debt portfolios is prescribed at 10 per cent.

Edited by Sushmita Choudhury Agarwal