AMFI’s Guidelines On Haircuts: Good But Optional

The mutual fund industry standards body released the guidelines to standardise haircuts asset managers need to take if their investments are downgraded.

The suggested write-downs in principal and interest range from 15 percent for the first downgrade below BBB to a full haircut depending on the type of investment, according the norms released by to the Association of Mutual Funds in India. They also depend on the sector and type of debt.

The norms follow troubles that mutual funds faced for their investments in debt paper of Infrastructure Leasing & Financial Services, Dewan Housing Finance Ltd., Essel Group and the Anil Ambani group companies.

The guidelines by the AMFI are optional but it's a way to standardise the write-offs by factoring in the type of debt, the sector and other important details, Anant Ladha, founder of Invest Aaj For Kal, said. Fund houses employ in-house methods for writing off a debt paper whenever a default occurs, leading to different valuations for the same underlying security, he said.

The AMFI suggested lower write-offs for secured debt of infrastructure and real estate firms, hotels, hospitals and loan against shares compared to unsecured securities. Trading, gems and jewellery firms fall in the high-risk category.

Here are the haircuts suggested by AMFI:

Ladha said the good part of the guidelines is that they cover troubled sectors like infrastructure, real estate and gems and jewellery. That could reduce ambiguity or lack of transparency in calculating NAVs, which would represent the actual valuation of the debt paper held, he said.

But Ajit Menon, chief executive officer at DHFL Pramerica Asset Managers Pvt. Ltd., sees the new guidelines as an interim measure adopted for consistency. In any case, based on Securities and Exchange Board of India's March 22 circular, rating agencies were supposed to come up with a valuation and pricing within 90 days for below-investment grade paper, which they were not doing before, he said.