Capital market regulator Securities and Exchange Board of India has issued a circular dated July 09, 2021[1], to All Mutual Funds (MFs)/ Asset Management Companies (AMCs)/ Trustee Companies/ Boards of Trustees of Mutual Funds/ Association of Mutual Funds in India (AMFI) about Valuation of securities with multiple put options present ab-initio. the provisions of this circular, the new framework will be applicable with effect from October 1st,2021 as stated in the circular.
It has been stated in the circular to refer to Provisions for “Valuation of securities with Put / Call options” in SEBI Circular dated September 18, 2000[2], and SEBI Circular September 24, 2019[3].
The circular dated September 24, 2019, has a section that particularly talks about the valuation of securities with put/ call options. It is stated that the existing provisions for the valuation of securities with the call option and the securities with the Put option will remain the same. However, there will be partial modification to the provisions of valuation of securities in both call option and put option. The circular talks about identifying a Put Trigger Date, And in case there is no Put trigger date, Then the valuation would be done to maturity price. It was also stated that Justification for not exercising the put option shall be provided to the board of AMC and trustees, if about option is not exercised by a mutual fund when exercising such put option would have been in favor of the scheme. the circular dated September 24, 2019, also deals with various Other provisions.
In the circular dated July 09, 2021, it is stated that a justification will need to be provided for not exercising the put option by the Mutual Fund to the valuation agencies, trustees, Board of AMC before or on the last date of the notice period, if the put option is not exercised by a Mutual Fund while exercising the put option would have been in favor of the scheme.
The remaining put options shall not be taken into the account by the valuation agencies for the valuation of the security, if the put option is not exercised by a Mutual Fund while exercising the put option would have been in favor of the scheme.
It was stated by the regulator that if the yield of the valuation price ignoring the put option under evaluation is more than the coupon rate / contractual yield by thirty basis points, then the put option shall be considered as ‘in favor of the scheme’.
"The operational guidelines of Sebi will ensure that mutual funds have proper systems to uprise the fund management team, that there's a put option coming and they have to decide on whether to exercise the option or not whichever is beneficial for the scheme holders," Sandeep Bagla, CEO of Trust AMC said.
Section 11(1) of the Securities and Exchange Board of India Act, 1992, read with the provisions of Regulation 77 of SEBI (Mutual Funds) Regulations, 1996 confers the power to the regulator to issue the circular to 0protect the interest of investors in the securities and to promote the development, and to regulate the securities market.
[1] SEBI/HO/IMD/DF4/P/CIR/2021/593
[2] MFD/CIR/8/92/2000
[3] SEBI/HO/IMD/DF4/CIR/P/2019/102
This Article Does Not Intend To Hurt The Sentiments Of Any Individual Community, Sect, Or Religion Etcetera. This Article Is Based Purely On The Authors Personal Views And Opinions In The Exercise Of The Fundamental Right Guaranteed Under Article 19(1)(A) And Other Related Laws being force In India, for the time being. Further, despite all efforts that have been made to ensure the accuracy and correctness of the information published, White Code Consulting & Governance shall not be responsible for any errors caused due to human error or otherwise.
