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sebi: Debenture trustees ask Sebi for change in valuation rules | #corporatesecurity | #businesssecurity | #


Mumbai: Trustees, representing all bond holders, have come together to ask the Securities & Exchange Board of India (Sebi) for a change in bond valuation rules as fund houses, insurers, and other investors stare at a spate of possible corporate defaults.

In the absence of a revision in the valuation rules, fund houses could come under redemption pressure following a write-down in bond valuation and decline in net asset values (NAV or, the price of a MF unit).

The market regulator, responding to the stress caused by the lockdown, had said that credit rating of corporate bonds need not be downgraded when the bond issuer and investors agree to alter the key features of the security — such as dates of interest payout and tenor. But, this holds no relevance for investors as long as the valuation rules remain unchanged.

Any change in the terms of a debenture is treated as default from the valuation point of view — triggering a 75% or 100% write down on the value depending on whether the security in secured or unsecured.

“Sebi is unwilling to change the valuation rule. It would require the regulator instructing the valuation agencies to treat a restructured debenture differently. Otherwise, even without a downgrade, fund NAVs would come down,” said a fund manager.

The industry body of debenture trustees has suggested that Sebi should consider the valuation prevailing on the day the restructuring happens.

According to a Sebi official, no decision has been taken on changing the valuation norm as unlike loans — for which the Reserve Bank of India has allowed a three-month moratorium on payment of interest and principal — debentures are capital market instruments.

Meanwhile, according to a report by the legal news website ‘Bar and Bench’, the Delhi High Court, in an ad interim order, has directed the maintenance of status quo with respect to the repayments to be made by Indiabulls Housing Finance to its non-convertible debenture (NCD) holders. However, company sources said it has been paying bondholders as it can access liquidity following RBI’s targeted long-term liquidity facility.

“However, in a situation where the court stays repayment, it’s unclear how rating and valuation of a security would be revised,” said an official with a credit rating agency.

“From the conversations we have had, the regulator may not immediately question funds if they independently estimate the fair price of bonds whose terms are rescheduled. However, it can put a question mark on such valuations in the course of audit. No fund would like that kind of uncertainty. So, funds are getting ready to face defaults,” said a senior fund manager.





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