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Unlisted equities in MF portfolios under Sebi scanner

December 26, 2022 

The earlier norms permitted investments in unlisted equity shares and equity-related instruments of up to 5% of NAV for open-ended schemes and up to 10% of NAV for close-ended schemes.

The Securities and Exchange Board of India (Sebi) has reached out to asset management companies (AMCs) for data on unlisted equities, two people familiar with the matter said.

The regulator wants to know the quantum of unlisted securities in the portfolios of AMCs, how they are being valued, what is the process being followed for disposing them and the timeline for doing so, if any.

These could be shares of companies that eventually delisted, shares bought in the unlisted market that were expected to go for a public share sale but didn’t, or unlisted shares resulting from a corporate action such as demerger of listed entities.

“At present, fund houses are not allowed to buy unlisted securities. But, historically, most fund houses would have unlisted equities in their portfolio,” said a fund manager on condition of anonymity.

In 2019, Sebi had come out with a diktat disallowing MF schemes to invest in unlisted equity shares, and permitting investments only in listed or to-be-listed equities. The aim was to do away with the high risk associated with investment in unlisted equity shares of companies.

The earlier norms permitted investments in unlisted equity shares and equity-related instruments of up to 5% of NAV for open-ended schemes and up to 10% of NAV for close-ended schemes.

“Some funds have been left holding pre-IPO stocks, which were unable to launch a public offering,” said a senior fund official. “As far as we are concerned, we have created a liquidity matrix to show how liquid the unlisted investment is, how many days it will take to exit the investment and what kind of liquidity needs to be created.”

For instance, several fund houses are believed to have purchased shares of the National Stock Exchange of India in the hope that it would go public and there was value to be unlocked. Shareholders of the company have been pushing for an IPO since 2015 which has not materialised so far.

“NSE shares are liquid and can be offloaded in the unlisted market. But the same may not be the case for other stocks. In most of the cases, the value of unlisted stocks in the books of mutual funds would be zero or close to zero. So, there won’t be a material impact on the NAV if they are sold or written off,” said the fund manager.

Industry officials believe that the regulator may not be in favour of mutual funds holding unlisted equities in their portfolios. While many funds carry such securities, the quantum of such holdings could be minuscule, reckon experts. Disposing these securities, however, could pose a challenge considering low liquidity for some of these shares.

It is not yet clear if Sebi will formally ask fund houses to offload all the unlisted equities within a given timeframe. The regulator has, in the recent past, been collating data from a number of market intermediaries before issuing directions. An email sent to the regulator did not immediately get a response.

“MFs are not allowed to invest in unlisted securities. However, there could be a brief period between the demerger of a listed company and the listing of the new company in which a scheme could hold unlisted equity,” said another senior fund official.

The Companies Act allows a company to delist its shares by entering into a scheme of arrangement for merger or demerger. The transferee (unlisted) company is not under an obligation to list its shares.

In 2019, the regulator had prohibited MFs from investing in unlisted debt instruments, including commercial papers, with the exception of government securities and other money market instruments. The regulations were prompted by the IL&FS crisis in 2018, which caught several debt MFs off guard, holding illiquid papers.

[The Financial Express]

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