The Securities and Exchange Board of India (SEBI) proposed on Thursday to mandate that valuations of mutual fund investments in repo transactions with a tenure of up to 30 days be conducted on a mark-to-market basis, aligning them with the norms for all other money market and debt instruments.
Currently, the valuation of repurchase (repo) transactions, including tri-party repo (TREPS) with a tenure of up to 30 days is carried out on a cost-plus accrual basis, which is amortisation-based valuation.
The different valuation methodologies can create a scenario wherein the commercial papers of an issuer would be valued at a mark-to-market basis whereas borrowing through repos on corporate bonds, by the same entity would be valued at a cost-plus accrual basis.
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“In such cases, the impact of any event/ adverse news concerning the above issuer may get reflected faster in the valuation of its commercial papers and consequently NAV as compared to the repo transactions, thereby creating an unintended regulatory arbitrage,” the regulator said in a draft paper.
SEBI’s proposal, inviting public comments by November 14, follows consultation with industry participants as well as the recommendation of the mutual fund advisory committee (MFAC).
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