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SEBI Revises Valuation Method

The market regulator is looking to ensure that the value of money market and debt securities in the portfolio of mutual fund schemes reflects the current market scenario

In an order to all mutual funds/asset management companies (AMCs), the Securities and Exchange Board of India (SEBI) has revised the valuation method of debt and money market instruments.

This is a continuation of the efforts of SEBI, started in the wake of the global meltdown, to ensure the industry does not get into another crisis situation.

SEBI is, through its rule change, looking to ensure that the valuations do not stray too far from the underlying securities.

According to the market regulator this will, "Ensure that the value of money market and debt securities in the portfolio of mutual fund schemes reflects the current market scenario."

Impact areas are:

I. Valuation of money market and debt securities with residual maturity of up to 91 days: 

All money market and debt securities, including floating rate securities, with residual maturity of up to 91 days shall be valued at the weighted average price at which they are traded on the particular valuation day.

When such securities are not traded on a particular valuation day they shall be valued on amortization basis. It is further clarified that in case of floating rate securities with floor and caps on coupon rate and residual maturity of up to 91 days then those shall be valued on amortization basis taking the coupon rate as floor.  

II. Valuation of money market and debt securities with residual maturity of over 91 days:

All money market and debt securities, including floating rate securities shall be valued at weighted average price at which they are traded on the particular valuation day. When such securities are not traded on a particular valuation day they shall be valued at benchmark yield/matrix of spread over risk free benchmark yield obtained from agency(ies) entrusted for the said purpose by AMFI. 

III. Valuation of securities not covered under the current valuation policy:

In case of securities purchased by mutual funds that do not fall within the current framework of the valuation of securities then such a mutual fund shall report immediately to AMFI regarding the same. Further, at the time of investment AMCs shall ensure that the total exposure in such securities does not exceed 5 per cent of the total AUM of the scheme. 

The valuation of such securities must get covered in the valuation framework within six weeks from the date of receipt of such intimation from mutual fund.  

In the interim period, till AMFI makes provisions to cover such securities in the valuation of securities framework, the mutual funds shall value such securities using their proprietary model which has been approved by their independent trustees and the statutory auditors. 

IV. Dissemination of information: 

All mutual funds shall provide transaction details, including inter scheme transfers, of money market and debt securities on daily basis to the agency entrusted for providing the benchmark yield/ matrix of spread over risk free benchmark yield. Submission of data would help in daily matrix generation and would improve uniformity and accuracy of valuation in the mutual funds industry.

The valuation would be applicable with effect from July 1, 2010.