As many as 36 schemes of mutual funds will fall foul of Sebi’s latest rules that limit the exposure of the funds in instruments such as additional tier 1 (AT-1 or perpetual bonds) and tier 2 bonds.

An analysis by credit rating agency Crisil said the 36 schemes of 13 fund houses held more than 10 per cent of their net asset value of their debt portfolio in such papers. The regulator had also said a single scheme cannot hold more than 5 per cent of their NAV in a single issue.

Crisil said none of the fund houses has breached another restriction by the Securities and Exchange Board of India (Sebi) viz. they cannot now hold more than 10 per cent of their holdings across all schemes in a single issue.

Last week, Sebi had came out with a circular on the review of norms regarding investment in debt instruments with special features such as additional tier 1 (AT-1) and tier 2 bonds as well as the valuation of the perpetual bonds.

The directives prompted a sharp retort from the finance ministry which objected to the valuation rule for the perpetual bonds. North Block directed to Sebi to scrap the rule that said such instruments should be treated as having a 100-year tenure.

Sebi had also said the investments in excess of the limits may be grandfathered. Such schemes shall not make any fresh investment in these instruments till their exposure comes below the specified limits.

North Block, however, said the instructions that reduce the concentration risk of such instruments can be retained as fund houses have adequate headroom even within the ceiling. According to Crisil, the Sebi move will mitigate risk in debt portfolios of retail investors.

The agency said banking and public sector undertaking (PSU) fund categories have the highest number of schemes — seven — exceeding the cap.

Five schemes of credit risk funds have exceeded the cap. Others to cross the limit are four schemes from medium duration funds, four from medium- to long-duration funds and three from dynamic bond funds.
Piyush Gupta, director, Crisil funds Research, said the move to grandfather limits previously held was a positive step.

“In the medium- to long-term, with the caps in place, it can reduce the MFs’ appetite for these securities, thus limiting the risk for investors. This is also prudent given the advent of influx of individual investors into debt funds.”

Gupta said the individual investors may not have the ability to understand MF portfolios and gauge risk, especially in such type of bonds. “We saw how they were caught unaware by the recent write-offs,” he said.

Additional tier 1 bonds are perpetual debt instruments that cannot be redeemed at the option of the holder and carry fixed coupon. They are issued by banks which do not have a maturity date and are, hence, called perpetuals but have higher risks.

On the other hand, additional tier 2 bonds are one-two notches above AT-1 bonds of a bank and therefore have high loss-absorption features.

The RBI had opened up these bonds to retail investors about six years ago.