Recently, the Association of Mutual Funds in India (AMFI), has issued a new set of guidelines that are designed to guide how fund managers approach the process of writing down debt and navigating the tricky waters of sub-investment grade paper. The guidelines serve as recommendations for AMCs on how to be more proactive when applying the standard hair-cut matrix on this type of investment-grade debt securities without waiting for rating agencies to downgrade them.
Understanding the Guidelines
Under the umbrella of these guidelines, AMFI has proposed lower provisioning for secured debt associated with varied sectors including infrastructure, real estate firms, hotels, hospitals, and the contentious domain of loan against share or LAS paper. These guidelines also stipulate that any security with a rating below BBB- should be deemed to be below investment grade as per SEBI guidelines.
The term ‘haircut’ in this context refers to mutual funds inadvertently discarding the principal amount and the interest in situations where a default occurs. Before the implementation of these guidelines, this decision was typically made by each individual asset management company (AMC) or fund manager.
Impact on Asset Management Companies
Asset Management Companies presently harbour fears that implementing the standard haircut matrix might trigger heavy redemptions. This could potentially lead to a drastic downturn in the net asset value of their fund. These fears are not unfounded, considering the recent SEBI circular that asked AMFI and the valuation agencies – Crisil and Icra Management Consulting Services Limited (IMaCS) – to devise a valuation methodology for such investment grade papers.
A Little About AMFI and AMC
Established on August 22, 1995, AMFI is a non-profit organisation that stands as the association of SEBI registered mutual funds in India. It is dedicated to developing the Indian Mutual Fund Industry on professional, healthy, and ethical lines. Its main goal is to elevate and maintain standards in all sectors as a means of safeguarding and promoting the interests of mutual funds and their unit holders.
| Fact | Description |
|---|---|
| AMFI Incorporation Date | August 22, 1995 |
| Function of AMFI | Promotes and protects the interests of mutual funds and their unit holders. |
| SEBI’s Definition of Sub-investment Grade | Any security with a rating below BBB- |
| Haircut in Investment Context | Mutual funds writing off the principal amount and the interest in case of a default. |
Understanding Asset Management Companies (AMCs)
An asset management company (AMC) refers to a firm that invests pooled funds from its clients, using this capital to make diversified investments. These can range from stocks, bonds, and real estate to master limited partnerships. Some AMCs also offer exchange-traded funds (ETFs) or public mutual funds and are hence alternatively called investment companies or mutual fund companies.
