September Newsletter - 2019

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SEBI has issued a new circular regarding the valuation of money market and debt securities after the recent impact of defaults on debt funds and liquid funds.

1. Traded and non-traded money market and debt securities has been defined as follows: A money market or debt security shall be considered as traded “when, on the date of valuation, there are trades (in marketable lots) in that security on any  recognized Stock Exchange or there are trades reported (in marketable lots) on the trade reporting platform of recognized stock exchanges or The Clearing Corporation of India Ltd. (CCIL). In this regard, the marketable lots shall be defined by AMFI, in consultation with SEBI.” A money market or debt security shall be considered as non-traded “when, on the date of valuation, there are no trades (in marketable lots) in such security on  any recognized Stock Exchange or no trades (in marketable lots) have been reported on any of the aforementioned trade reporting platforms.” Besides, SEBI has also removed the separate definition of thinly traded securities and now stands defined along with the non-traded securities.

2. The regulator wants debt funds to treat ‘any extension in the maturity of a money market or debt security’ as ‘default,’ for the purpose of valuation which means that the mutual fund has to mark down all securities held beyond maturity date by 75% of the exposure. Additional clarity is awaited on this as a large corporate house has been recently given extension by some mutual fund houses with regard to repayment on its instruments that have already matured this year. Besides, if the maturity of any security is shortened and then subsequently extended, it will be considered a default and Put options inserted after issuance of security shall not be considered for the purpose of valuation and the valuation will continue based on the original terms.

3. SEBI has permitted an amortization based valuation for money market and debt securities including floating rate securities, with a residual maturity of up to 30 days till March 31st, 2020. Further, the amortized price shall be used for valuation only if it is within a threshold of ±0.025% of the reference price provided by AMFI appointed agencies. In case of the amortised price deviating beyond this threshold, the price shall be adjusted to bring it within the threshold of ±0.025% of the reference price. From 1st April 2020, all money market and debt securities irrespective of residual maturity shall be valued at the average of security level prices obtained from valuation agencies. This applies for Government Securities including T-Bills as well.

4. SEBI wants mutual funds to follow a "waterfall" approach for the valuation of money market and debt securities. Under this approach, all traded securities would be valued on the basis of traded yields by AMFI appointed valuation agencies after removal of any outlier trades. The Volume Weighted Average Yield (VWAY) for trades in the last one hour of trading will be used as the basis for valuation of government securities including treasury bills while all other money market and debt securities shall be done on the basis of VWAY of all trades during the day. Besides, the regulator has barred the use of self trade price for valuing inter-scheme transfers and has come up with a framework for the valuation of the same.

5. For the waterfall approach used in valuation, SEBI has asked AMFI to issue framework on polling and on the responsibilities of mutual funds in the polling process. The valuation agencies will identify the mutual funds who will participate in the polling process on a particular day. The nominated mutual funds will have to necessarily participate in the polling process and need to record the detailed reason if a fund fails to participate on that day.

6. In case a mutual fund decides to deviate from the valuation price given by the valuation agencies then the AMC has to record the rationale for every single instance of such deviations.

7. SEBI has extended the present timeline up to 11 pm for uploading the net asset values of all schemes (except Fund of Fund schemes) on their websites and of AMFI.

8. The regulator said a money market or debt security will be classified as "below investment grade" if the long-term rating of the security issued by a credit rating agency is below BBB- or if the short-term rating of the security is below A3.

SEBI has issued a circular regarding Risk Management Framework for Liquid & Overnight Funds

1. From April 1st, 2020, all liquid funds shall hold at least 20% of their net assets in liquid assets. For this purpose, liquid assets shall include cash, government securities, T-bills and repo on government securities. In case the exposure in such liquid assets falls below 20% of net assets of the scheme, the fund house will first have to meet the 20% norm before making any further investments. 

2. Effective immediately, liquid funds and overnight funds have been barred from parking money, pending deployment, in short-term deposits of scheduled commercial banks, any debt securities having structured obligations (SO rating) and/or credit enhancements (CE rating). However, debt securities with a government guarantee have been excluded from such restriction.

3. Mutual Fund going forward will have to levy exit load on investors who exit the Liquid Fund within 7 days of their investment starting for all fresh investments from October 20, 2019.

4. The cut-off timings for applicability of Net Asset Value (NAV) in respect of the purchase of units in liquid and overnight funds shall be 1:30 p.m. instead of 2:00 p.m., effective from October 20, 2019.



The annual rate of inflation, based on monthly WPI, stood at 1.08% (provisional) for the month of August 2019 as compared to 1.08% (provisional) for July 2019 and 4.62% during August 2018. Regarding future RBI rate cuts, the RBI Governor Shaktikanta Das said that there is scope for interest rate cuts as inflation is likely to remain below the target of 4% but also warned that the government may not have the fiscal room to revive growth.

Despite recent liquidity boosting measures that include infusion of more capital into public sector banks, RBI’s fortnightly data on Bank Credit showed that gross bank credit growth fell to 10.26% for the fortnight ending Sept. 13. This is at the lowest levels since March 2018, unchanged from August last fortnight and well below the peak of 15.11% of last fortnight in December 2018.

India plans to maintain its borrowing plan for the second half of 2019-20 amid concerns that the government will overshoot its fiscal deficit target because of the loss in revenue due to corporate tax rate cuts. The government is expected to borrow Rs 2.68 lakh crore in the October-March period in 17 weekly auctions as per a Bloomberg report. The Economic Affairs Secretary has said that there will be an issuance of floating-rate bonds at 10% of the total issue size.

India’s fiscal deficit (the gap between the government’s revenue and expenditure) widened marginally in August over July to Rs 5.53 lakh crore, roughly 78.7% of the budgeted estimate of Rs 7.04 lakh crore for FY20. On a positive note, the fiscal deficit level is lower than that at the time of August last year when it had reached 94.7% per cent of the FY19 target.

India’s current account deficit (the gap between the net fund inflows including trade-related funds and the net fund outflows) widened in 1Q FY20 compared to the previous quarter but was narrower than the deficit in the same quarter last year. The current account gap in the first quarter of FY20 stood at $14.3 billion or 2% annualised GDP, narrower than the $15.8 billion or 2.3% annualized FY19 GDP. Foreign Direct Investments, External Commercial Borrowings and Foreign Portfolio Investments led to reduced CAD.


The Delhi High Court has issued notices for a hearing on 15th December following a petition by ‘Citizens Whistle Blowers Forum’ which alleged that the NBFC, Indiabulls Housing Finance and related companies, advanced loans to dubious companies and routed back the money to Indiabulls’ promoters.

RBI has imposed restrictions on Punjab & Maharashtra Cooperative Bank (PMC Bank) on disbursing any fresh or renewing of loans and advances, making investments, accepting deposits or borrowing funds without prior approval from the Central Bank. The restrictions will continue for 6 months from Sep 23. RBI also limited the withdrawal by the bank customers to not more than Rs 1,000 from their savings, current or any other deposit account, however, this has been increased to 10,000. It has been reported in the press that more than 2/3rd of PMC’s 8800 crore rupee loan book is given to a single borrower group, Housing Development and Infrastructure Ltd.

The Reserve Bank of India has decided to place Lakshmi Vilas Bank Ltd. under its Prompt Corrective Action (PCA) framework from 27th September. For 1Q FY20, the bank reported a Net Loss of Rs 237 crore, Gross Non-Performing Assets (GNPA) Ratio at 17.30% and Net-NPAs at 8.3% with a Capital Adequacy Ratio of 6.46%. The bank said that normal operations will continue despite the PCA cover except the continuation of any lending to the corporate sector.


Core personal consumption expenditures (PCE) price index in the US, which excludes food and energy, increased 1.8% in August 2019 from August 2018. The broader PCE price gauge, which the Fed officially targets for 2% inflation, was unchanged from the prior month and rose 1.4% from a year earlier.

The US Federal Open Market Committee cut the target range of the fed funds rate by 25 bps to a range of 1.75%-2% on the back of global uncertainties. The Fed also cut the interest it pays to banks on excess cash reserves above the required level by 30 bps to 1.80%.

The Organization for Economic Co-operation and Development (OECD) has said that the global economy in 2019-20 will see its weakest growth since the 2008-2009 financial crisis this year, slowing from 3.6% in 2018-19 to 2.9% this year. The forum has revised down its growth projections for 2019 from 3.2% due to the intensifying trade conflicts and the likelihood of these conflicts standing long.

The China Banking and Insurance Regulatory Commission on Sept. 20 published draft rules requiring net capital of banks’ wealth businesses to be at least 40% of their net assets. This is likely to help increase the holding of corporate and bank deposits and government bonds along with Chinese Equities. The proposed move would reduce allocation to riskier shadow banking products of the nature of private debt and equity. The risk weightings drafted for Wealth Management Product (WMP) holdings of other banks’ capital instruments could encourage cross-holdings among lenders and Banks may also allocate more of their WMP portfolios into equities as the risk weightings for investing client money in listed shares are zero. Stocks made up only 2% of the total WMP holdings at the end of 2018.









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