The Securities and Exchange Board of India (Sebi) has eased valuation norms for the mutual fund (MF) industry, allowing valuation agencies to make exceptions if default by a corporate bond issuer is due to lockdown conditions or loan moratorium permitted by Reserve Bank of India (RBI) leading to asset-liability mismatches.

According to market participants, the move will help in stalling mark-to-market impact on portfolios of debt schemes due to the cornavirus (Covid-19)-related lockdown and provide relief on exposures to non-bank financial companies (NBFCs).

“This will help in reducing mark-to-market impact on portfolios to some extent at initial stage, as valuation agencies can avoid considering default valuations for NBFCs, affected by extending moratorium to their borrowers,” said a fund manager.

However, experts say there can still be operational challenges. “The Sebi circular also says that MFs shall continue to be responsible for fair valuation. So, some MFs may still go ahead and write-off defaulting exposures, while others may take another approach. It will also be difficult for any MF to take a view that the default is purely on account of lockdown or moratorium, with overall economic growth under pressure,” said senior executive of a fund house.

“Further, there is no clarity on whether MFs can side-pocket such exposures if valuations are not pegged at default valuations. Lack of side-pocket can impact recovery for existing investors, allowing new investors to gain from recovery,” he added.

NBFCs have come under pressure as banks not really willing to extend the moratorium to them, and are showing reservations in extending liquidity to NBFC debt papers through the targeted loan term repo operations or TLTRO.

On Thursday, first tranche of RBI’s TLTRO only saw bids worth Rs 12,850 crore as against the Rs 25,000 crore on offer.

“In view of nationwide lockdown and three-month moratorium / deferment on payment permitted by RBI, a differentiation in treatment of default, on a case to case basis, needs to be made as to whether such default occurred solely due to the lockdown or loan moratorium,” Sebi said in its circular.

The market regulator said that if the delay in payment or extension of maturity is due to RBI-permitted moratorium -- leading to operational challenges in debt-servicing -- valuation agencies may not consider the same as a default for the purpose of valuation.

The relaxations shall be in force, in-line with the moratorium, provided by RBI.

Recently, the debenture trustees on behalf of MFs and other bondholders had approached Sebi to seek relaxation on valuation norms.

“Some fund houses were concerned that markdowns in debt portfolios will lead to hit on net asset values, causing panic among investors and redemptions,” said another fund manager.