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TMI BlogGuidelines for valuation and provisioning of non-performing assets and corrigendum Gazette Notification dated July 26, 2000X X X X Extracts X X X X X X X X Extracts X X X X ..... the gazette notification dated July 26, 2000 is also enclosed. Yours faithfully, P. K. NAGPAL Encl : a/a SECURITIES AND EXCHANGE BOARD OF INDIA MUTUAL FUNDS DEPARTMENT GUIDELINES FOR VALUATION OF SECURITIES FOR MUTUAL FUNDS Mutual funds shall categorise the securities according to the following norms: 1. Traded Securities : When a security (other than Government Securities) is not traded on any stock exchange on a particular valuation day, the value at which it was traded on the selected stock exchange or any other stock exchange, as the case may be, on the earliest previous day may be used provided such date is not more than thirty days prior to valuation date. 2. Thinly Traded Securities : (i) Thinly Traded Equity/Equity Related Securities : When trading in an equity/equity related security (such as convertible debentures, equity warrants, etc.) in a month is less than ₹ 5 lacs or the total volume is less than 50,000 shares, it shall be considered as a thinly traded security and valued accordingly. Where a stock exchange identifies the "thinly traded" securities by applying the above parameters for the preceding calendar month and publishes/provides t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se. (d) The value as per the net worth value per share and the capital earning value calculated as above shall be averaged and further discounted by 10% for ill-liquidity so as to arrive at the fair value per share. (e) In case the EPS is negative, EPS value for that year shall be taken as zero for arriving at capitalised earning. (f) In case where the latest balance sheet of the company is not available within nine months from the close of the year, unless the accounting year is changed, the shares of such companies shall be valued at zero. (g) In case an individual security accounts for more than 5% of the total assets of the scheme, an independent valuer shall be appointed for the valuation of the said security. (ii)(a) Non Traded /Thinly Traded Debt Securities of Upto 182 Days to Maturity : As the money market securities are valued on the basis of amortization (cost plus accrued interest till the beginning of the day plus the difference between the redemption value and the cost spread uniformly over the remaining maturity period of the instruments) the same process should be adopted for non-traded debt securities with residual maturity of upto 182 days, in the absence of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for each duration bucket. The benchmark as calculated above will be set weekly, and in the event of any change in the Reserve Bank of India (RBI) policies affecting interest rates during the week, the benchmark will be reset to reflect any change in the market conditions. Note : The concept of duration over tenor has been chosen in order to capture the reinvestment risk. It is intended to gradually move towards a methodology that incorporates the continuous curve approach for valuation of such securities. However, in view of the current lack of liquidity in the corporate bond markets, a continuous curve approach to valuation would be necessarily based on limited data points, and this would result in out of line valuations. As an interim methodology therefore it is proposed that the Duration Bucket approach be adopted and continuously tracked in order to fine tune the duration buckets on a periodic basis. Over the next few years it is expected that with the deepening of the secondary market trading, it would be possible to make a gradual move from the Duration Bucket approach towards a continuous curve approach. B . Building a Matrix of Spreads for Marking-up the Benchmark Yiel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ties the marking process for rated and non rated securities would be differentiated as follows C(I) Adjustments for Securities rated by external rating agencies The Yields so derived out of the above methodology could be adjusted to account for risk mentioned above. A Discretionary discount/premium of upto +/-50 Basis Points for securities having a duration of upto 2 years and upto +/- 25 Basis Points for securities having duration higher than 2 years will be permitted to be provided for the above mentioned types of risks. The rationale for the above discount structure is to take cognizance of the differential interest rate risk of the securities. This structure will be reviewed periodically. C (II) Adjustments for Internally Rated Securities To value an un-rated security, the fund manager has to assign an internal credit rating, which will be used for valuation. Since un-rated instruments tend to be more illiquid than rated securities, the yields would be marked up by adding +50 basis point for securities having a duration of upto two years and +25 basis point for securities having duration of higher than two years to account for the illiquidity risk. Valuation of securitie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... against all such investments which are recognised as illiquid securities. (c) Mutual Funds shall not be allowed to transfer illiquid securities among their schemes w.e.f. October 1, 2000. (d) In respect of closed ended funds, for the purposes of valuation of illiquid securities, the limits of 15% and 20% applicable to open-ended funds should be increased to 20% and 25% respectively. (e) Where a scheme has illiquid securities as at September 30, 2001 not exceeding 15% in the case of an open-ended fund and 20% in the case of closed fund, the concessions of giving time period for reducing the illiquid security to the prescribed limits would not be applicable and at all time the excess over 15% or 20% shall be assigned nil value. SECURITIES AND EXCHANGE BOARD OF INDIA MUTUAL FUNDS DEPARTMENT Guidelines For Identification and Provisioning for Non Performing Assets (Debt Securities) For Mutual Funds: (A) Definition of a Non Performing Asset (NPA) An 'asset' shall be classified as non performing, if the interest and/or principal amount have not been received or remained outstanding for one quarter from the day such income / instalment has fallen due. (B) Effective date for class ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of the asset as NPA. * Another 25% of the book value of the assets should be provided for after 15 months past due date of interest i.e. 12 months from the date of classification of the asset as NPA. * The balance 25% of the book value of the asset should be provided for after 18 months past due date of the interest i.e 15 months form the date of classification of the assets as NPA. Book value for the purpose of provisioning for NPAs shall be taken as a value determined as per the prescribed valuation method. This can be explained by an illustration : Let us consider that interest income is due on a half yearly basis and the due date falls on 30.06.2000 and the interest is not received till 1st quarter after due date i.e. 30.09.2000. This provisioning will be done in following phased manner : 10% provision 01.01.2001 6 months past due date of interest i.e 3 months form the date of classification of asset as NPA (01.10.2000) 20% provision 01.04.2001 20% provision 01.07.2001 25% provision 01.10.2001 25% provision 01.01.2002 Thus, 1 1/2; years past the due date of income or 1 1/4; year from the date of classification of the 'asset' as an NPA, the 'asset' will be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th erosion. __Provision should be made as per the norms set at (D) above as soon as the asset is classified as NPA. __Full provision can be made if the rating comes down to grade 'D' (H) Reschedulement of an asset : In case any company defaults either interest or principal amount and the fund has accepted a reschedulement of the schedule of payments, then the following practice may be adhered to : (i) In case it is a first reschedulement and only interest is in default, the status of the asset namely, 'NPA' may be continued and existing provisions should not be written back. This practice should be continued for two quarters of regular servicing of the debt. Thereafter, this be classified as 'performing asset' and the interest provided may be written back. (ii) If the reschedulement is done due to default in interest and principal amount, the asset should be continued as non performing for a period of 4 quarters, even though the asset is continued to be serviced during these 4 quarters regularly. Thereafter, this can be classified as 'performing asset' and all the interest provided till such date should be written back. (iii)If the reschedulement is done for a second/third ..... X X X X Extracts X X X X X X X X Extracts X X X X
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