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The move would mean a debt security cannot have different valuations even in different fund houses. A trial test by MFs is already on, say two people familiar with the matter.
Currently, traded debt securities can be valued on the basis of weighted average price. Untraded ones can be valued on the basis of parameters set by an AMC’s valuation committee.
The Association of Mutual Funds in India (Amfi) has asked members to work with third-party entities to introduce a uniform valuation system for all securities across funds, said the sources. They expect it to be formally implemented from July. Officials from Amfi declined to comment on the issue.
“Data on these securities will be sent to rating agencies. They will compile the data on both traded and non-traded securities, providing an objective and independent means of valuing these,” said a debt fund manager who works with a bank-sponsored MF.
“We have used third-party uniform valuation for government securities. There were discussions on the matter and Sebi (the market regulator, Securities and Exchange Board of India) also wanted other debt securities valued in a similar manner. We are in a testing phase and it might take a few months to implement,” said the chief executive officer of a domestic MF.
Currently, the valuation for government securities is on the basis of the average of prices released by CRISIL and Icra, the two agencies approved for the purpose. Rating agencies will now aid valuations for all debt securities. “The rating agencies will accumulate data points on these securities by getting in touch with MFs and banks, in addition to applying their own models of valuation on these securities,” said another fund manager.
In December, the US regulator, the Securities and Exchange Commission (SEC), announced charges against eight former members of the boards of directors of MFs, of violating their asset pricing responsibilities under federal securities’ laws.
“The funds, invested in some securities backed by subprime mortgages, fraudulently overstated the value of their securities as the housing market was on the brink of financial crisis in 2007. The SEC and other regulators previously charged the funds’ managers with fraud, and the firms later agreed to pay $200 million to settle the charges,” stated the SEC.
Regulations required the fund directors to determine the valuations of securities whose value cannot be easily determined in the market. In one case, the fund did not use reasonable procedures for valuation and allowed the fund manager to set arbitrary values to the fund, according to the statement.
“As a result, the net asset values of the funds were materially mis-stated in 2007 from at least March 31 to August 9. Consequently, the prices at which one open-end fund sold, redeemed and repurchased its shares were inaccurate,” said the SEC order.
WINDS OF CHANGE
How are debt securities valued by mutual funds?
- Currently, mutual funds can value debt securities on the basis of traded price
- Untraded debt securities can be valued on the basis of parameters set by a valuation committee
- MFs plan to move to uniform valuation of debt securities
- Rating agencies will be used for determining valuations of both traded and untraded securities
- Every security to be valued at the same price across fund houses
- Move was planned for May, now pushed tentatively to July
- Non-transparent valuation of securities has come under scrutiny of international regulators
- SEC and others have charged fund managers with fraud; firms paid $200 million to settle charges
