Investment limit in corporate bonds likely to hit liquidity, feel funds

MUMBAI: Amtek Auto bond defaults may be prompting markets regulator Sebi to consider a 10% cap on individual corporate bonds. But such a measure could well be a drag on liquidity, increasing investment risks. At least some of the top mutual fund houses think so as they are taking up the matter with industry chiefs and will be presenting it to the Securities & Exchange Board of India (Sebi) in the next few weeks.

The valuation committee at industry body the Association of Mutual Funds in India may seek a dispensation for some top-rated corporate bonds, including stateowned Nabard, Rural Electrification Corporation, Power Grid Corporation, Indian Railways Finance Corporation, Sidbi, Exim Bank, PFC, said three people familiar with the matter.

Although there is no communiqué so far from the regulator mandating the single issuer limit, it is said to be considering the proposal in the wake of the Amtek Auto bond defaults which has resulted in losses to unit holders and redemption pressure on JPMorgan Asset Management Company in September.

"We are discussing on how to improve risk management," CVR Rajendran, CEO at Association of Mutual Funds in India, told ET. "Once we conclude on this after internal discussions, we will make a presentation to Sebi," he said.




In an illiquid corporate bond market in India only a handful triple-A rated securities have enough secondary market liquidity easing the buy and sale transactions. With limited issuances every year, all institutional investors including MFs try to grab those blue-chip papers as they offer higher investment safety with a perceived "quasi-sovereign" status compared to privately-held companies. A limit may compel investors to take exposures in riskier papers.

"A cap on individual paper may harm the industry as we are collecting feedback from members,"said Rajendran. Now, MFs can invest 15% (of the individual fund scheme) in single issuer corporate bonds while the exposure can go up to 20% with individual board’s permission. According to a regulatory proposal under discussion, no fund manager would be allowed to invest more than 20% of a scheme in securities issued by companies belonging to a corporate group, ET reported a few days ago.

The sector exposure limit is likely to be reduced to 25% from 30% while the single issuer limit may be brought down to 10% from 15%. With total assets under management of the mutual fund industry at more than Rs 13 lakh crore, there are regulatory concerns over the high absolute amount of exposure to any single issuer and the impact of possible downgrades in future.