Valuation of Debt securities by Mutual Funds - SEBI - SEBI/IMD/CIR No. 9/141601/08

DEPUTY GENERAL MANAGER INVESTMENT MANAGEMENT DEPARTMENT SEBI/IMD/CIR No. 9/141601/08 October 18, 2008 To, All Mutual Funds Registered with SEBI Association of Mutual Funds in India (AMFI) Sir/ Madam, Sub: Valuation of Debt securities by Mutual Funds This is in partial modification of SEBI Circular No. MFD/CIR/8/92/2000 dated September 18, 2000 and MFD/CIR No. 14/442/2002 dated February 20, 2002, which, inter-alia, specified the discount adjustments for debt securities rated by external agencies for ill-liquidity risk, promoter background, finance company risk and issuer class risk. It has been brought to notice of SEBI by AMFI and CRISIL that the current valuation methodology which allows the discretion of -50 basis points (bps) to +100 bps to account for the aforesaid risks is inadequate as debt securities of similar maturity and credit rating are being traded over wide range of yields. With a view to ensure that the value of debt securities reflects the current market scenario in calculation of net asset value, it has been decided to increase the discretion permitted. Accordingly, the clauses C(I) and C(II) of the circular dated September 18, 2000 and clause 4 of the circular dated February 20, 2002 shall be revised as follows: Category Current Proposed + - + - Rated instruments with duration upto 2 years 100 bps 50 bps 500 bps 150 bps Rated instruments with duration over 2 years 75 bps 25 bps 400 bps 100 bps In case of unrated debt securities : Category Current Proposed Unrated instruments with duration upto 2 years Discretionary discount of upto +50 bps over and above mandatory discount of +50 bps Discretionary discount of upto +450 bps over and above mandatory discount of +50 bps Unrated instruments with duration over 2 years Discretionary discount of upto +50 bps over and above mandatory discount of +25 bps Discretionary discount of upto +375 bps over and above mandatory discount of +25 bps Other contents of the aforesaid circulars remain the same. These guidelines shall come into effect immediately. This circular is issued in exercise of powers conferred under Section 11 (1) of the Securities and Exchange Board of India Act, 1992, read with the provisions of Regulation 77 of SEBI (Mutual Funds) Regulations, 1996, to protect the interests of investors in securities and to promote the development of, and to regulate the securities market. This circular is available on SEBI website at www.sebi.gov.in, under the category Mutual Funds Circulars . Yours faithfully Ruchi Chojer