· According to new regulations issued by the Securities and Exchange Board of India (SEBI), liquid mutual funds holding debt securities with a maturity term of more than 30 days will have to value these securities on a mark-to-market basis.
· Until now, liquid mutual funds could report the value of debt instruments with a maturity term of up to 60 days using the amortisation-based valuation method.
· Only debt securities with a maturity term of over 60 days were to be valued on a mark-to-market basis. So the new rule seemingly narrows the scope for amortisation-based valuation.
· SEBI’s new rules come in the midst of the crisis in Infrastructure Leasing and Financial Services (IL&FS) that led to various fund managers reporting the value of the same debt instruments issued by the infrastructure lender at vastly different levels.
· The new SEBI rule gives a strong incentive for liquid mutual funds to invest more of their funds under management in securities with a maturity period of fewer than 30 days which helps avoid the volatility of mark-to-market accounting and the need to provide a fair account of the value of their investments.
· A decrease in the yields received is likely on securities maturing in 30 days or less and an increase in the yields on debt instruments with a maturity period of 31 to 60 days.
· It will, however, do nothing to make investors in mutual funds become more informed about the real value of their investments.
· The latest SEBI rules are also in direct contrast to the usual accounting practices when it comes to the valuation of securities.
· Generally accepted accounting principles mandate securities with the least maturity to be reported on a mark-to-market basis while allowing the amortisation-based method to be employed to value other securities with longer maturity periods.
· This makes sense as the profits and losses associated with securities with shorter terms are closer to being realised by investors when compared to longer-term securities.
· SEBI would do well to mandate that all investments made by liquid mutual funds should be valued on a mark-to-market basis.
· Simultaneously, it should work on deepening liquidity in the bond market so that bond market prices can serve as a ready reference to ascertain the value of various debt securities.
Source : The Hindu
07.03.2019