The Securities and Exchange Board of India (“SEBI”), vide circular dated October 1, 2020 (“October Circular”), has revised the circular issued for the valuation of debt and money market securities on September 24, 2019 (“September Circular”) due to the COVID-19 pandemic. Valuation agencies engaged by the Association of Mutual Funds in India (“AMFI”) can recognize a default of security under clauses 5.1.1.2 and 9.1.2 of the September Circular. The concerned provisions had been relaxed by a circular issued by SEBI on April 23, 2020 (“April Circular”) till the period of moratorium permitted by the Reserve Bank of India.

The October Circular provides discretion to valuation agencies engaged by asset management companies (“AMCs”) and the AMFI for recognition of default in case the proposal for restructuring of debt is solely due to stress caused by the pandemic. In such instances, any proposal of restructuring received by debenture trustees must be communicated to the investors immediately. Any proposal received by mutual funds from lenders, issuer or debenture trustees and other material information required for the purpose of valuation must also be reported immediately to the valuation agencies, credit rating agencies and the AMFI. The AMFI is further required to disseminate such information to its members.

The October Circular lays down that if the valuation agency, based on its assessment of the proposal, opines that the proposed restructuring is solely due to the fallout of the COVID-19 pandemic then it may not consider the restructuring or non-receipt of dues as a default for valuation of money market or debt securities held by mutual funds. Valuation agencies must further ensure that change in terms of investment, financial stress of the issuer and the capability of the issuer to repay the dues or borrowings on the extended dates are reflected in the valuation of securities. In case there is any difference in the valuation of securities provided by two valuation agencies, the conservative valuation will be accepted.

The October Circular will come into force with immediate effect and the modifications issued to the September Circular will remain in force until December 31, 2020. The October Circular further clarifies that as per the Principles of Fair Valuation specified in the Eighth Schedule of the SEBI (Mutual Funds) Regulations, 1996 and other circulars issued, AMCs will continue to be responsible for the fairness of valuation of securities.

Please find a copy of the October Circular here, a copy of the September Circular here and a copy of the April Circular here.

This update has been contributed by Adity Chaudhury (Partner) and Rongeet Poddar (Associate).