Mumbai: The Securities and Exchange Board of India (SEBI) on Monday lowered the amount of corporate debt that mutual funds can hold in individual companies and sectors to prevent investors from potentially damaging over-exposure.P.

The SEBI rules also bar a fund from holding more than 20 percent of its net asset value in companies belonging to the same corporate group, though it is extendable to 25 percent after approval from the trustee."Also companies will have to find other avenues to raise funds like from banks, insurance companies."People will now buy more riskier paper to meet the criteria, so instead of diversifying risk they have increased the risk in the system," said Murthy Nagarajan, head of fixed income at Quantum Asset Management.The regulator also reduced the amount of exposure debt funds can hold on a single sector from 30 percent to 25 percent of net assets, among other restrictions.

The SEBI is not only cutting how much company debt a single fund can hold, it is also imposing restrictions on investments in related entities as well as sectors.The rules will also force companies to diversify their investor base, bankers said. Photo: Pixabay The rules will also force companies to diversify their investor base.That limit would be extendable to 12 percent after approval from the fund's trustee compared with 20 percent earlier - the amount of debt a J.Morgan fund had held in Amtek Auto's debt.SEBI said the restrictions do not apply to debt issued by state-run companies and banks.Separately, SEBI also approved rules for the issuance of green bonds and primary issuance of debt through an electronic platform, finalising the draft rules announced in November.

The new rules, announced after a board meeting on Monday, were widely expected given India's market regulator had previously said it would closely review potential risks in the corporate debt investments by mutual funds."The rules require funds to not hold more than 10 percent of its net assets in debt issued by a single company - down from 15 percent earlier.

The rules are in response to market turmoil last year when a unit of JP Morgan in India suffered significant mark-to-market losses after a big investment in the debt by Amtek Auto Ltd soured auto bearings factorys Manufacturers when the auto parts maker was downgraded by rating agencies."Mutual funds will have to diversify the companies in which they will invest now that there is a single and group borrower limit," said a debt investment banker at a foreign bank.However, some fund managers warned they could now be forced to buy debt from more companies, potentially pushing them towards riskier bonds they would not have previously considered.The rules will also force companies to diversify their investor base