The Securities and Exchange Board of India (“SEBI”) had by way of its circular, dated December 28, 2018 (“MF Circular”), permitted asset management companies (“AMCs”) to create segregated portfolio of debt and money market instruments by mutual funds schemes, in order to ensure fair treatment to the investors in case of a credit event and to deal with the liquidity risk. Under the MF Circular, such segregation by AMCs in mutual fund schemes was permitted in case of a credit event at issuer level i.e. downgrade in credit rating by Credit Rating Agencies (“CRAs”) registered with SEBI.
On August 6, 2020, the Reserve Bank of India (“RBI”) by way of 'Resoulution Framework for COVID-19 related Stress' ("Resolution Framework") provided for a resolution window under the existing RBI (Prudential Framework for Resolution of Stressed Assets) Directions 2019, dated June 7, 2019 ("Prudential Framework"), to mitigate financial stress faced by borrowers on account of the COVID-19 pandemic. Further, in view of the Resolution Framework, SEBI has vide its circular dated August 31, 2020 (“CRA Circular”), allowed CRAs to not recognize default, if the CRAs are of the view that restructuring by lenders/ investors is solely due to COVID-19 related stress or under the Resolution Framework.
In view of the above, SEBI vide its circular dated September 2, 2020 (“Circular”) has modified the MF Circular to provide that the date on which the proposal for debt restructuring is received by AMCs shall be treated as the trigger date for the purpose of creation of segregated portfolio, as mentioned above. Further, such proposal of debt restructuring received by AMCs shall be immediately reported to the valuation agencies, CRAs, debenture trustees and Association of Mutual Funds in India (“AMFI”).
Please find a copy of the MF Circular here, a copy of the Resolution Framework here, a copy of the CRA Circular here and a copy of the Circular here.
Contributed by Aastha (Partner) and Swaraj Singh Narula (Associate).
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