Market regulator Sebi has stated that every liquid fund should put at least 20 per cent of its total corpus in highly liquid and zero-risk debt market instruments like government bonds and treasury bills, which could lower risks for investors in these schemes. In its board meeting earlier, it had also decided that debt and liquid funds will not be allowed to invest more than 20 per cent of their corpus in debt instruments from any particular sector and not more than 10 per cent in housing finance companies.
It also placed stricter norms for promoters of listed companies to pledge their shares and enhanced disclosure standards for such pledges. Sebi added that companies can pay up to five per cent of their annual sales royalty to entities like promoters and associated entities and such payments will not be qualified as related-party transaction.
The decision is aimed at ensuring that such funds have easily encashable assets to fall back on in case of a sudden spike in redemptions. This is aimed at ringfencing retail and small investors from incurring sudden and huge losses during volatile bond market situations. It was reported earlier last month that Sebi was contemplating such a move, which is similar to statutory liquidity ratio (SLR) for banks and liquidity coverage ratio (LCR) for NBFCs.
An annual average of £45 billion is invested in liquid funds currently across 40 fund houses. Sebi also barred liquid and overnight schemes from investing in short-term deposits, debt, and money market instruments having structured obligations or credit enhancements facilities. Sebi has also banned fund houses from entering into standstill agreements with promoters of companies. In its board meeting, Sebi also tightened disclosure norms for pledging by promoters and said that even indirect lien of shares will qualify as encumbered shares. The promoters pledging shares will have to furnish reasons if combined encumbrance crosses 20 per cent of the company's equity capital or 50 per cent of the promoter holding in the company.