Can you tell me the implications with SEBI allowing mutual funds to do side pocketing when debt funds are restructured?

Here are some of the key highlights of the SEBI announcement pertaining to side pocketing of mutual funds.

· SEBI allows debt MFs to segregate securities of companies in case the investee company opts for a debt restructuring due to COVID-19 stress

· SEBI has also clarified that the date on which the proposal for debt restructuring is received by AMCs will be the trigger date for creation of segregated portfolio

· In the current framework, side pocketing can only be invoked for downgrades below BBB- level. In restructuring cases, side pocketing is allowed on higher graded paper too.

· By allowing such restructured debt to be side pocketed, fund managers will not rush for the exits, which normally leads to a sharp fall in bond prices

· In such cases, side pocketing will also ensure that opportunistic investors do not profit at the cost of existing investors by buying at distress rates

· SEBI has clarified that this is a temporary move and this framework will only be applicable till Dec-20

· For the MFs, it gives breathing space if any exposure in their funds comes under stress and needs restructuring. Panic selling can be avoided

· This special clause for side pocketing will only be applicable in the case of restructuring that is an outcome of the COVID-19 impact, not otherwise

· This special facility was necessitated after RBI allowed lenders to offer resolution avenues to borrowers despite withdrawal of EMI moratorium

However, the onus is on the fund to report such restructuring proposals to credit rating agencies, valuation agencies, debenture trustees and AMFI with immediate effect.