SEBI has issued a Circular reviewing its provisions on valuation of debt and money market instruments due to COVID-19 pandemic. This Circular was issued on 1st October 2020 and its provisions are effective immediately and will be in force till 31st December 2020.
It may be noteworthy that on 31st August 2020, SEBI issued a Circular providing relaxation to Credit Rating Agencies in recognition of default for restructuring by the lender/ investors solely due to COVID -19 related stress.
SEBI has now decided to extend discretion to valuation agencies to recognise defaults in cases where the proposal of restructuring of debt is only due to COVID-19 related stress. This discretion is granted to valuation agencies engaged by Asset Management Companies (AMCs) or the Association of Mutual Funds of India (AMFI).
The valuation agency may not consider the restructuring or non-receipt of dues as default for the purpose of valuation of money market or debt securities held by mutual funds. This will occur only if upon assessing the proposal, the valuation agency forms the view that the proposed restructuring is solely on account of the fallout of the COVID-19 pandemic.
Furthermore, any restructuring proposal received by debenture trustees must be immediately communicated to the investors. Any proposal received by mutual funds from lenders or issuers or debenture trustees must be immediately reported to the valuation agencies, credit rating agencies and the AMFI. The AMFI shall then disseminate such information to its members immediately.
Moreover, valuation agencies must ensure that any changes in the terms of the investments, the financial stress of the issuers and the capabilities of the issuers to repay the dues on the extended dates are reflected in its valuation of the securities.
The Circular also clarifies that in case of differences in the valuation of securities by two valuation agencies, the conservative valuation, among the two, will be accepted. Additionally, AMCs will continue to be responsible for the true and fair valuation of the securities.
